Magic/Magical in Diablo II can mean one of the following:
Damage: Magical
Magic damage is the opposite of physical damage, where in some sort of spell or magic item is used to induce damage to a player or a monster.
Item Quality: Magic
Magical items are one quality level higher than Normal and can have at most one prefix and one suffix.
More information can be found on the item quality page. The magical quality levels are Normal, Magical, Rare, Set and Unique.