When installing Diablo II, is it your LOD CD or the originals that are having the issue? I would suggest that instead of trying to install the game, copy all the files on the discs to a folder and name it Diablo II. Once you've done that, you should be able to start the game correctly if you get the *no longer non-legit D2Loader*.
If you can't copy all the files to your harddrive, then you know there is either a problem with your CD-rom drive, or the CD's themselves.
Once you get it on your harddrive, I can walk you through the rest.