If you mean that you get a flickering and unstable display, that means your video card is having trouble at that resolution.
I have a file server that uses a built-in video card (some old S3 chip), and at higher resolutions (1280*1024, 32bit) it's flickering as well if I try to play DVDs/Divx. If I turn down the resolution or reduce the color to 16bit/pixel, then it's fine.
Try to get the newest drivers from ATI for your card (probably from the previous millenia), but if that doesnt help it simply means your card can't handle high bandwidth video transfer at 800*600. Try raising the resolution of your monitor to it's max and playing some random DivX file ... see if you get the same flickering.
Diablo/D2 at 1024 is not exactly demanding, even for an old DX7 card ... so hopefully in your case it's just a driver issue.
p.s. Your card is AGP 2.0. Check your board bios to make sure that the AGP port is set to it's highest speed.