The installation FAQ has more data than I'll give you rigth here, nevertheless here's the thumb-nail sketch:
1: Install D2 and LOD without D2Loader or any similar hack (they change the binary executable on your hard drive, which renders it incompatible with the MOD installer)
2: Upgrade the installed version to 1.latest from Blizzard itself, as if you were going onto their battle.net
3: Download and run the 769.exe Mod.
4: In your D2/LOD directory, find ChaosEmpire.exe, and double-click it. It will ask you if D2 is closed (not running). Make sure you aren't, and click OK. You should get a response that the MOD is activated.
5: Download and unzip and install (overwrite) the 769_upd.zip files on top of the activated mod.
6: Play single (at home) or online with us.