Third Party Programs are programs created by companies or individuals other than Blizzard. These can be minor and harmless programs to help you keep track of your characters and their equipment, or programs designed to cheat and hack your Diablo II character, or to screw over other players.
This page contains general information about 3rd party programs. See the hacks and warnings pages for more details about the bad things that happen to players who try to use 3rd party programs. See the category:3rd party programs for a full listing of these programs.
Blizzard Says No
The use of 3rd party programs is specifically prohibited by Blizzard, and players agree not to use them by accepting the the Diablo II EULA and ToS. (Which must be accepted to install the game.) Blizzard has an interest in keeping players from using hacks and cheats (whether beneficial or detrimental) since they disrupt the corrupt the game play and economy. Furthermore, players attempting to use 3rd party programs are very regularly victimized by computer viruses and trojan horses of every type, and players who get their characters or accounts jacked, or their computers ruined by such programs, tend to blame Blizzard.
Computer experts and experienced users strongly recommended against using 3rd party programs even if they are obtained from trusted sources. Even if the program itself is not harmful (to you or others) quite a few 3rd party programs are hosted by unsavory websites who load the programs with trojan horses or viruses that can steal your account, delete your characters, or simply destroy your computer.
Such malware programs that were in heavy use in the early days of Diablo II, and even before then with Diablo I, are now seen infecting players of every other popular online game, especially World of Warcraft.
Account Theft
The simplest and most damaging trick is to put a key logger in with a 3rd party program. The 3rd party program is a trojan horse, and it may or may not work, but that's irrelevant to the hacker. All they care is that you install it, allowing their virus access to your computer. That program will then sit quietly, until you trigger it by starting up Diablo II. It will then record all key strokes made for some time, as well as reading the account information transmitted to Battle.net. This information is then transmitted to the hacker in some fashion; usually by launching an email, or a browser window that connects to an online form of some sort.
The hacker then has your account name and password, and can log on and change your password, or simply steal all of your equipment and/or delete your characters.
Script Kiddies
Incidentally, this sort of thing requires very little technical know-how on the part of the hacker. These type of malicious users are called "script kiddies" since they simply use programs written by others. A typical key logger program can be obtained from any hacking site or IRC channel, and once he's got it the script kiddie just needs to change some fields in the program to have it send the key logged information to his email, or post it to a form on his website.