When I heard Daggerfall was released I finally downloaded DOSbox 0.73. I have opening the game with DOSbox sussed, but not setting it up properly.

So far I can only play in windowed mode with the original resolution, the problem is when I go fullscreen with original resolution it becomes so blocky I can make very little out, Rats become brown squares, stuff like that, I am guessing its my monitor which is a 22 inch LCD. Is there anything I can do to fix this?

I tried putting fullscreen resolution to 1920x1080 (native) but its just too much and Daggerfall becomes a slide show.

Hmm... I know the graphics are outdated, but it sounds like you're having a special problem. Could you post a screenshot?

Running a 320x200 game in 1920x1080 will cause blockiness.

You could try various DOSBox filters if you want, change scaler=normal2x to scaler=hq3x in the DOSBox config file and try it out, but don't expect miracles, it's still a 320x200 game.