It seems a bit too pixelated.....I know it is impossible to get rid of all..but how do you improve it a bit..?

You can try various scalers in DOSBox (hq3x and so on). You can change them by editing the dosbox config file.

As well as trying the different scalers in the config file, you can also run it in a window which reduces the pixelation. I used to run it in a 15" window with a complete black border and it looks miles better than full screen. Daggerfall and all low res DOS games look their best on smaller screens.

I have found that setting the fullscreen resolution to 640x480 and the scaler to 2xsai results in the smoothest graphics. The others use interpolation and that annoys me.

How do I do this??? what number do I put in?

You have to open the DOSBox configuration file in Wordpad and edit it by hand. That or you can get a front-end and allow it to do all of the work for you. If you're having a hard time with DOSBox configurations, you're welcome to try my front-end, which comes preconfigured for Daggerfall and Arena. There are also other front-ends on the DOSBox site. All of them allow you to select your settings in Windows instead of hand-editing the configuration file yourself.

can you give me a link? I can't seem to find it.....

Open the DOSBox configuration file in Wordpad. It is called "dosbox.conf" and should contain information on editing it.

I found it..but do I do tbhis in daggerfall cfg? or Dosbox cfg? also.....what is the best combination of fullresolution and scaler in addition to the one mentioneb above...??

If you have a specific Daggerfall config file, then use that one. Otherwise use the dosbox config file.

I use "fullscreenresolution=640x480" and "scaler=2xsai" combined with "core=dynamic" and "cycles=max" for what I consider to be the smoothest graphics and best framerate. Also, I use the OpenGL renderer, but this may not work on all video cards. I have an ATI card in my laptop for example, and it is slow as heck on the laptop.