That's D2, with the 2nd oldest patch, IIRC.
Does it actually work for D1 that Blizzard have repeatedly said there's no intention of releasing a similar patch to remove need for disc while playing?

I tried it on my laptop with XP but I haven't got it to work yet.
Well I distinctly remember copying the file and then doing something. If that was changing a path somewhere or using a crack I can't recall. The problem is that I can't find a config file or similar. Diablo don't exactly install much on your HD...
I do know I've got a couple old games to work without the CD by copying content from the CD to the game directory and then changing a path. Daggerfall is one example.

Okay, here is the whole thing... I'm using Windows 7 x64 (as many others on this forum, I guess), so that would make this case the worst possible when comes to compatibility. So, here are the things that I noticed during my test few days ago. I don't have the image now, but will download it tomorrow to see if I can really get the game going without graphical glitches, without using any cracks or stuff like that, and with a working battle.net service.
First, you insert or mount the Diablo disc / image. And you install the game on the default system partition, in this case it is C, but outside the two Program Files folders, somewhere in C:\Games or something like that. After installation, remove the disc / unmount the image.
Second, the game requires data that is stored on the disc. Well, you copy that data, it is a file named DIA"something".MPQ in the folder where you installed the game.
Third, there is a registry key called Diablo disc or something like that. Its value is the letter of the drive, F, G, D or whatever your drive has. It actually points to the location of the DIAxxx.MPQ file. You can easily switch this value to show the path where you installed the game and copied the MPQ file.
Now, here is where the problem arises. The game apparently has some kind of copy protection integrated into the storm.dll file. And, no matter if you changed that registry key or not, this copy protection will still stand in your way, and ask for the disc. You can bypass this copy protection using a simple crack that adds only like 2 bytes of data in that storm.dll file. But the problem is, after you use that crack, the battle.net service does not work anymore, saying that you have a unrecognizable version or something like that.
-So, we leave the cracks out of this.
-We make another virtual drive with Virtual CloneDrive (I prefer this instead of Daemon Tools).
-We change the registry key to point to the letter of the drive on which the image will be mounted.
-We start the game, but there are graphical glitches because the OS is from 2009 and the game from 1996, and the way colors are used has changed.
So, this is the place where I failed. I didn't test much after this, because I kind of got into Penumbra.
For my coming test:
-I will try to make the game playable with the image mounted, and without graphical glitches.
If I succeed in the first, then:
-I will try to make the game playable without any disc/image, and without graphical glitches.
Will let you know what happens, in a few days, after I'm done with some other stuff first. ;)

Update:
I tested around quite a few things. Apparently, this is the case:
-You must kill the Windows 7 x64 explorer.exe process if you want the game to run without problems (and you must have the image mounted or disc inserted). Single player and Battle.Net should work just fine without modifying anything else.
-You can play single player when: you do that registry change, copy the required file from the image / disc, use a crack to modify the storm.dll file, and use Windows 98 / ME compatibility. Single player will work fine, but you will be unable to use Battle.net if you want to play online.
Until Blizzard release a patch that removes the disc check, I'm afraid we'll only have these two choices. Pick which one suits you better.

[Hey man, Im looking for a place where I can download an image file for Diablo 1, any tips? Thanx!

This is not a pirate site, go buy it.

I loved Hellfire, don't know what people's problems with it are. What's wrong with the Monk class?

Only thing is the Hive doesn't fit with the demonic/undead theme of the rest of the game.

I think I'll have to find a copy of this. I loved D2, but I don't know if I'll be able to stand all the rainbows that are in Diablo 3. I need some proper horror settings with only one colour of light.

By the way, is Tristam in D1 laid out the same as destroyed-tristram (where you find Deckard Cain) in D2? --and what's Wirt like?

Yeah, the Blizzard Store.

I got Diablo for $1. Haven't even touched it yet.