I heard in Daggerfall installation there is something called Child Guard. Is it supposed to remove nudity and blood? Does it tone down the rating to Teen basically?

Child Guard does just what you said. However, be aware:

1) It doesn't take care of all nvde characters. I don't know the specifics but some graphic depictions still are in the game.

2) I've been told that it basically replaces blood with generic sparkles and causes defeated creatures to turn into a pile of generic nondescript bones.

3) Some nvde enemies and NPCs are not modified, but rather simply don't have sprites - meaning several enemies and quest-important characters may be invisible ingame.

4) The game is still very dark compared to the other games, and I wouldn't say it'd bring it down to a T rating. The dungeons are still full of torture chambers and some of the quests still deal with moral-ambiguity and advlt topics.

The nudity in DF isn't bad really. I find nudity in games distasteful, but daggerfalls nudity is acceptable to me cause of it's pixellation.

It's tasteful nudity though, like ritual dancers...

...and prosttutes.

I realize that everyone has different comfort levels with this sort of thing; but to me, DF nudity is too cartoonish to be a major concern.