The gritty atmosphere... Including the nudity, skimpy clothing and gore.
^ That.
Bethesda used to be pretty ballsy, but then I guess that''s not really feasible for most companies anymore. The games simply cost way too much and take too long to produce to limit your customer base right out of the gate or to take risks.
The things I liked in Daggerfall were the advantages and disadvantages system, and the magic item creation and enchanting. They were pretty simple but fun. Creating magic gems was really cool. I also miss the pageboy running up and handing you a note. That was cool too. I also liked in a strange way the color coding system for all the armor, like blue for mithril, green for orcish and red for daedric. You would get really excited when you saw a certain color of item show up in the loot table or when you were stealing from a store. I still have fond memories of waiting until dark and then breaking into the stores to rob them blind, hoping that I didn't wake the owners or alert the guards.
One strange part that I fondly recollect, even though it was a pretty big exploit, was dodging into a house when the guards were following you. They'd get stuck outside, but as you ran throughout the house you could hear them yelling at you through the walls. If you found a good two story house, you could go upstairs and then exit the house and leap from the second floor for a better chance at escaping. That was definitely more like a good swashbuckler kind of escape from the movies that is absent now (with godlike guards that you cannot get away from).
I was also a little creeped out and anxious while exploring the dungeons too. You never knew what was going to jump out at you, and both the music and the sound effects combined for a really eerie experience. If I was particularly tired or had simply been in a dungeon for too long, it would eventually get under my skin and I would reach the point where I just had to leave - forget the rest of the loot! I was just too freaked out to stay in there any longer.
I loved the seasons and the holidays. I wasn't used to games like that, and that was definitely something I thoroughly enjoyed about Daggerfall (and of course Arena as well). I also loved how every region seemed to have its own theme of music. That was also something I wasn't accustomed to back then. Even now I can recall some of the themes to my noggin without having to go look for the midi files for a refresher. They were really catchy and enjoyable.
The level of customization over all was fairly new to me as well back then, and I that was one thing I definitely enjoyed about it, especially being able to reduce one stat for extra points to put into a new stat. And of course, I still recollect with a strange fondness the sound of rolling dice whenever you rolled up new stats (the sound reminded me of that cup full of dice from Yahtzee).
Ah, the memories. The first experience with that game will be forever etched in my memory. That was a really terrific experience. And despite some of the amazing things they've done in Morrowind and Oblivion, I've never managed to recapture or replace that experience.