Taemos, after reading your post I decided I wanted to try it. I also have a 7900 GS video card with a widescreen monitor of 1680 x 1050.

A quick rundown of what I did:
1.) Set proper fullscreen resolution
2.) Set renderer to OpenGL
3.) Set scaler to "normal3x"
4.) Set "aspect=true"

What should #1 be?

fullresolution=1680x1050 will do the job.

is there a way to do this with an LCD monitor (DOSBox settings?) that doesn't have a 1.6 aspect ratio? My native width is 1400, but when I try "fullresolution=1400x875" it appears smaller and nested in a large swath of black space, and still looks like a 4:3 shape.

figure it out, in case anyone wants to know, you have to set

aspect=false

so i concluded that the widescreen doesn't look as good, the doors & people seem to be of odd proportion, too wide, seems more cartoon like. with the 16:9 ratio, my character in the inventory screen is less than 6 heads in height. with 4:3 it is better, about 6.25, but realistic human proportions are between 7 and 8 heads height (although my character is a high elf, i'm sure all the other races will be the same so that clothes and armor fit). so, went back to 4:3.

edit: oh yeah, so my question was, why is daggerfall 320x200? i didn't think widescreen screen format was common for computers back then, if at all...

A lot of DOS games were in 320x200 it was a common res back then, some could run in 640x480 like Sytem Shock and a few others. The most popular monitors back then were 14 and 15 inch crt's, DOS games always look their best on small monitors because of the low resolutions they run in.

Yes.

The most common resolutions one would find in 90's DOS games:
-320x200
-320x240
-640x400
-640x480

Naturally the first two are often 2x scaled so that we don't go blind trying to read text. Getting widescreen ratios is tricky - especially on LCDs which cannot run low resolutions in fullscreen nicely. What, on my old CRTs, would make a game look "nice and old and pixellated" now ends up getting blurry and really awkward looking.

Daggerfall isn't widescreen. 320x200 was the common resolution for DOS games. It was never meant to be showed on a widescreen monitor, but instead on a normal 4:3 monitor. DOS also got some other tricky resolutions that were meant for 4:3 monitors, like 320x400 and 640x400.

So the pixels for most DOS games aren't square. But rectangular and very "tall". The aspect ratio setting in DOSBox sorta fixes this, and make the pixels "tall".