In some cases, when changing a lookup search filter value, the filter doesn’t update properly, causing visual and functional problems.
Steps to replicate:
CA Service Desk 17.3 and 17.4
Following the steps described above, the problem can be reproduced. However, adding one extra step helps it to work as expected.
Step 3 tells us to show the filter again, MANUALLY clear the Lookup field, and then start typing in another value, e.g., "Projects." Do NOT select it like previously, but hit Enter immediately (or click on Search before losing focus from the lookup field to anything else) to Search. Those exact steps produce the result you report in step 4. But, if you add the extra click to select it from the dropdown, the search works correctly.
This is working as originally designed. The extra click to select the value you're typing in is required to get the correct result from the search.