Daggerfall was designed for MS-DOS or Win95. As such, it ran fairly well on any of the Win9x operating systems. Installing is simply a matter of dropping the CD into the drive and following the on-screen prompts. Your hardware is most likely far in excess of the system requirements, but as long as you have the appropriate drivers or emulators, you should have no problems. I've installed and run Daggerfall on Win95, Win98 and WinME with no major problems.
Current processors are ten to twenty times faster than those in existence in 1996. I would recommend downloading and installing a processor slower such as Mo'Slo to avoid problems with levitation, swimming and climbing. They make the video run a little choppy, but everything else seems to work fine.
The Microsoft pure 32-bit OSs are another problem entirely. Daggerfall does not run well on Windows NT or Windows 2000. I have tried for months to get it up and running under 2K with no success. Some people have managed to get it to work, but I am not one of them. Perhaps it is possible if your hard drive were to be formatted as FAT32 (which eliminates all problems associated with NTFS permissions), but Win2K is a straight 32-bit OS that does not allow any programs to access hardware without going through the kernel. Some 16-bit apps can play well in that environment, most can't. I suspect that Daggerfall is in the latter category.
For those running Windows XP Home, you may be in luck. The OS supports Win9x "compatibility mode". This supposedly tailors the OS to emulate the appropriate Win9x environment. Just right-click the program icon in the \dagger folder, select "properties" and the "compatibility" tab and make the appropriate adjustments. It would probably help if your drive were formatted to FAT32 to eliminate the permissions problems associated with NTFS.
For those running Windows XP Pro, you might try following the above steps, but if your drive is NTFS, I suspect that you're going to have permissions problems (I did).
There is an entire thread in the Past Games forum of ElderScrolls.com dedicated to getting Daggerfall to run under Windows XP. Check it out.
As mentioned on the Welcome page, DOSBox is the emulator of choice for running Daggerfall and many other DOS-based programs. I recently tried installing an older game designed for Win9x and ran into all sorts of headaches getting it to run on Vista, even in compatiblity mode. Rather than pulling my hair out in frustration in tweaking all of the permissions in the \Program Files\ folder, I tried installing it to the root of my user directory. Presto! All problems solved. The downside of this arrangement is that no one else in the house can play that game unless they go install it to their user directory, too, but that seemed to resolve all of the permissions issues. So give this a shot: