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Windows cannot do loopback processing for downlevel or local users. Loopback processing will be disabled.
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As per Microsoft: "This is an informational event that indicates that Group Policy loopback processing works only if the computer and user objects are in either a Windows 2000 or Windows Server 2003 domain. The computer and user objects can be in different domains; for example, one can be in a Windows 2000 domain while the other is in a Windows Server 2003 domain. However, you cannot deploy Group Policy to users in a Windows NT 4.0 domain by applying loopback to a computer in a Windows 2000 or Windows Server 2003 domain". See MSW2KDB for more details.
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