That's what I'm doing, and I have to say, despite the randomly-generated quests, cities, and dungeons, I'm enjoying exploring. I've joined a knightly order(although now I'm wishing I joined a knightly order in Wayrest) in Daggerfall and Daggerfall City has become my base of operations. Just so I don't waste a thread, are there any Dark Elves in this game besides me(Barenziah, Morgiah?)? I also found a holy tome that's worth 2500 gold. What are all these religious items(holy tome,holy water, religious items, etc.) I keep finding? Are they useful for anything, or should I just sell them? Also, I don't have enough magicka to cast levitate or teleport, so are there any items that would do that for me? I need both of these spells, or at least teleport, but I can't and never will be able to cast them with my current character.
Dark Elves: I don't know. I've really paid no attention to the ethnicity of any of the NPCs except Barenziah. ("The Real Barenziah" is a 6 or 7 vol. biography; interesting).
Religious items: Useless, sell them.
Magic items. Best/only? way I know of to get those magic items is to get access to an Item Maker (i.e. a person who can enchant items). You have to be either level 5 in the Mages Guild OR level 5 in the Temple of Julianos to gain that access.
(IMHO the 2cnd most important thing I do in Daggerfall is making lvl 5 in the Mages Guild). (The most important? Making lvl 8 in the Mages guild, gaining access to its teleportation system).