For the four questions I asked, your answers were:
1) Yes, v1.21 was installed.
2) No, v1.21z was not installed.
3) Yes, you ran d2ModSetup.bat.
4) No, you
might not be starting D2:HU with the correct parameters.
I don't mind that you didn't answer them as concisely, since you did answer them, and your answers gave additional information anyways. Excellent.
Steps for you to follow:
1) Install the 1.21z update patch:
http://forum.arimyth.com/viewtopic.php?f=8&t=596.
You should run D2ModSetup.bat again. I'm not 100% sure it'll change anything, but as mentioned earlier, it never "Uninstalls" anything, so just run it to be sure. I'm paranoid that the message does mean something, so I like to run it until it says it installed. Perhps someday I'll bother to open up the .dll file it's calling and actually check what's going on with that dumb message.
2) The purpose of starting HU with the "Hell Unleashed.bat" file is to ensure that your start the antihack program, and start diablo2 with some special parameters. Personally, I don't use Loader, since I view it as a lame exploit to either Enchant or BO chars, or just rush them. You're correct that it's accepted by the community in general. I don't have experience with using HU via Loader, but I can still advise you a bit.
Whatever Icon you're using to start the game, there must be a way to configure the Parameters (aka Arguments, Settings, Start-ups, etc).
You
must use Parameters:
-direct -txt
It might appear in this way:
Start: "Diablo II.exe" -direct -txt
or something like this:
Run: "C:\Program Files\HU\Diablo II.exe" -direct -txt
If the above doesn't make sense to you, then perhaps search the Tech-Support forum for the word "Loader" and see what other people have answered. There's also a very good chance someone will be able to continue helping you in this thread, since we've identified the areas you were having trouble with.