Two questions:
1. Can the virtual C: drive be a directory that has more than 8 characters? E.g. "C:\Program Files\Bethesda Softworks\" becomes virtual C:
2. Can I turn off 8.3 filenames in NTFS and still run Daggerfall? It's a minor performance tweak, since virtually no modern applications require them. This may be more of a question as to whether or not DOSBox can handle this.
You can mount any folder regardless of character length. You just need to remember to enclose the entire path in quotes. That way, if there are spaces it will still mount gracefully. Once mounted to a virtual C: drive, it's simply going to be treated as C:\. DOSBox will automatically truncate files down to the 8.3 format if necessary, so there is no need to change any Operating System settings to accommodate DOSBox. I just tested this to be sure. And to clarify, you can't actually disable 8.3 filenames. You can disable the automatic creation of 8.3 filenames from long filenames, but a filename that happens to fit the 8.3 standard doesn't suddenly stop working. According to http://support.microsoft.com/kb/121007:
The creation of 8.3 filenames and directories for all long filenames and directories on NTFS partitions may decrease directory enumeration performance. This article describes a method of disabling the 8.3 name creation on all NTFS partitions.
NOTE: Although disabling 8.3 name creation increases file performance under Windows NT, some 16-bit applications may not be able to find files and directories with long filenames.
If it does turn out that DOSBox fails to recognize long file names when the 8.3 filename creation is disabled, you should still achieve success by simply making sure your folder structure complies with the 8.3 standard. It shouldn't be necessary to enable the creation of 8.3 filenames if you're already complying with the 8.3 standard for your DOSBox apps.