I don't see any problem.
Opening your test project, I see that you are searching a field BEHIND a FKey. (Recursive)
So, if you want to make some test, you should fill at least one linked item.
TODO :
In your form, instance your 'foreign_key' field.
In sandbox, add some elements, and create some links trough this foreign_field combo.
Then, in the search, you will be able to find items that are one level depth. (as you created)
IMPORTANT NOTE :
Creating recursive tree that maneer is not recommendated. I understand it is a test project, but anyway...
I precise that the 'Nested' sytem is coming in 2012 and will be the perfect and optimized way to do it.
Best regards. and welcome to the community.