This is one of the really big problems in Daggerfall: It runs well only on a very limited range of computers. Official system requirements are a 486DX2 66MHz, 8MB RAM, 50MB hard drive space, and a local bus or better video card. The full installation takes up about 450MB disk space. Officially, you still need the CD in the drive, but that's easy to bypass.
Save files in Daggerfall are large, saving and loading games can take ages. This alone is a reason you would want to run it on something faster, unfortunately, it begins to misbehave if the computer is too fast. From what I read, "too fast" starts at about 450 MHz. Speed-related bugs are subtle, but get annoying with time. Mainly the climbing and swimming skill do not work.
Daggerfall is, of course, a DOS game, but designed to run under of Windows 95. Some prefer to run it this way, since the 32-bit drivers make saving and loading games faster. Maybe you get better sound, too. There seem to be no problems running the game under later Windows versions, including XP, but it should not be located on a NTFS partition.
A wavetable sound card is absolutely recommended. Daggerfall supports the more common ones, like the SoundBlaster AWE family or the Gravis Ultrasound.