So it's like a construction set for it? I don't really understand what he is saying.
It's basically a port. He's making a brand new engine that lets you play Daggerfall natively in Windows. Ideally it will fix all the bugs that exist in the DOS version of Daggerfall, allow for higher resolutions and longer draw distances, and add a slew of optional features and enhancements that didn't exist in Daggerfall. Since it uses the Daggerfall assets, you still need to obtain a legal copy of Daggerfall (pretty easy now) and install it/patch it to the latest version (not quite so easy). DaggerXL essentially replaces your Daggerfall executable, so that you don't have to use DOSBox to play Daggerfall. If you've ever played any of the Windows-based Doom ports, DaggerXL is basically the Daggerfall equivalent of one of those ports.
DaggerXL does have its own http://daggerxl.50.forumer.com/index.php and http://daggerxl.wordpress.com/, where you can see what DaggerXL is all about. In fact, if you go to the blog and scroll down a bit to the first video you see, you'll get to see DaggerXL in its current state, which should also give you a pretty clear idea of what it is. Make sure you scroll down and view all the videos and screenshots.
Lucius eventually plans to add mod support, so it will act like a Construction Set, but that's not it's main purpose.