Group Policy for Terminal Server not working

This is the setup:

1. Windows 2003 domain
2. Windows 2000 TS server (for simplicity we'll call him TS-Server)
3. TS-Server is in TSOU
4. Created a Global group TS-Users which consists of users from
various OU's
5. Created and linked a Group Policy object in TSOU
a. This policy has loopback enabled set to "Replace"
b. This policy has User Configuration/Windows Componets/Terminal
Services/Start a program on Connection enabled and set to run a
specific program
c. Under security filter I added the computer account and the TS-
Users Global group

When a user from TS-Users connects to TS-Server the policy is not
applied and the user gets a normal desktop. I have also tried exact
set up above with putting in the working directory - still does not
get applied.

Does this maybe not work because Im using a Windows 2000 TS server?

Well I found a clue to my problem but don't know how to fix it -
everything Ive looked up on this error references using loopback with
users in an NT 4.0 domain - which I don't have so Im a bit stumped as
to why this would happen.

In the event viewer I get an Event ID 1000 which says: "Windows cannot
do loopback processing for downlevel or local users. Loopback
processing will be disabled."

On Jun 19, 1:01 am, "Mark Heitbrink [MVP]" <spam-
o....TakeThisOut@gruppenrichtlinien.de> wrote:
> Hi,
>
> myrddinbach schrieb:
>
> > 1. Windows 2003 domain
> > 2. Windows 2000 TS server (for simplicity we'll call him TS-Server)
> > 3. TS-Server is in TSOU
> > 4. Created a Global group TS-Users which consists of users from
> > various OU's
> > 5. Created and linked a Group Policy object in TSOU
> >     a. This policy has loopback enabled set to "Replace"
> >     b. This policy has User Configuration/Windows Componets/Terminal
> > Services/Start a program on Connection enabled and set to run a
> > specific program
> >     c. Under security filter I added the computer account and the TS-
> > Users Global group
>
> Hm, looks perfect to me.
>
> What happens if you enable something different, like "NO desktop Icons"
> Did you run a gpresult.exe? Is the GPO in the list?
>
> Mark
> --
> Mark Heitbrink - MVP Windows Server - Group Policy
>
> Homepage:www.gruppenrichtlinien.de- deutsch
> Blog:     gpupdate.spaces.live.com  - english