A loopback is what the name suggests - a communication with only one endpoint. ie, the starting and ending locations are one and the same. A PC's loopback IP is 127.0.0.1 and is an integral part of internet and network communications. One of its most common uses is to access a web page on a local server from that same PC, fo example.
A loopback adapter is used for testing a virtual network in which conventional network access is not possible. This also allows its use when there is a conflict between network adapters or endpoints.
Microsoft has a Loopback Adapter component that can be used in Win XP - search the Knowledgebase if you want to know more about that.
In addition, there is a form of "virtual" loopback that some network components use to configure themselves. It is virtual because the endpoints are not actually identical, even though it behaves in that way.
I hope that goes some way to allaying your concerns.
Well, you did ask.... ;o)