I FIXED my problem!!!
I can play the game now

Here's the run down of what I did:
I tried the Windows Codecs that you suggested, the win9 ones wouldn't install though, the other set did...but I was still having the exact same problem.
I tried different resolutions just to be sure, but no go.
So I had basically decided that I'd hang onto the game until I upgraded my comp and either did a fresh install of XP on a new drive or upgraded to win7.
Having un-installed all the various "codecs" that I could find like ffshow and my divx suite...I decided that for now I might as well get an xvid codec installed so I could view the various files I have (tv, movies and such) without a problem.
I decided to install the K-Lite Full "codec" package that I found on the filehippo.com site, I've used it before and felt it was a safe site.
Ran the install of the latest version and it "flagged" several files/reg entries that were in it's words, broken. And it recommended that I remove them...I did so as I was prompted to during the install.
Once it was all installed (did the default/suggested ver) I decided to try D2 one more time...just to see lol
And it worked!!!
Been playing for a few hours now with no major problems...other than my ram slowly climbing from the initial 70% load to the mid to high 90% (memory leak?)
Anyway...I'm very happy to have found a way to fix my codec problems.
I'd highly suggest this package to any who are having the same issues, might just be broken or corrupted files/registry issues and it looks like this K-Lite package will identify them and allow you to remove them when installing it's package.
here's the link for any who might care to try it:
http://www.filehippo.com/download_klite_codec_pack/Best of luck to all and Thank You for all the suggestions and help!!!
Warm Regards