I rewrote your query to distinguish between individuals and groups.  I did some simplification that may not be warranted.  Specifically, I removed the cycle check, because you should not have cycles, but you can always add a depth check to stop processing after a certain depth.


;WITH Members AS
(
    --Anchor

    SELECT
    GroupCode,
    Member
    FROM #GroupMembers
    WHERE MemberType = 'Individual'

    UNION ALL

    --Recursive call
    SELECT h.GroupCode, m.Member
    FROM #GroupMembers h
    INNER JOIN Members m
        ON h.Member = m.GroupCode
    WHERE h.MemberType = 'Group'
)

SELECT *
FROM Members m
WHERE @GroupCode = GroupCode


This gives me most of the results that you expect, and the one case where it is different (5), I think that your expected results are wrong.

Drew