Combining Smart Group, Regular Group and other returns inaccurate result

Please see attached for demonstration on demo site of the inaccurate results when combining the following search criteria:

1. a smart group and a regular group
2. another criteria, such as name

What should happen (please correct me if wrong) is that the search will return people who are in one or both groups AND meet the name criteria.

In the attached case, the result should be 3 contacts. Instead it is 60.