Is it possible to play Daggerfall in fullscreen without the colors messing up? I'm on Windows 7 and everytime i switch to full screen the color gets all weird looking.

I had a similar issue, also on win7, and I don't remember how I fixed it. Try messing with the render method in Dosbox, also don't use Alt+enter to switch, change the config so it starts in fullscreen by itself.

Try changing the colour depth of your desktop.

Open the dosbox config file and change the output to something else, preferably ddraw or openglnb.