For starters you could read one of the DOSBox tutorials (depending on what OS you use).
Basically, to apply a patch to the game, you need to go into DOSBox prompt, then navigate to the directory where Daggerfall is installed.
DOSBox mounts a real directory (folder) on your HDD as a virtual HDD drive. For example, the game might be installed in C:\Games\Dagger on your machine. DOSBox will mount one of the folders, for example, \Games\, as the virtual C: drive. When you get into DOS prompt in DOSBox and go to the C: drive, the contents of the \Games\ folder shall be displayed as the contents of the root directory of this virtual C: drive.
If the game is installed in the \Dagger\ folder then you need to place the patch file (while being outside DOSBox yet) into it. In other words, the patch must be in the same folder as FALL.EXE.
Then you start DOSBox and get into the DOS prompt. Type "C:" (without quotes) to get to the virtual C: drive (this assuming that the game is installed as in the example above), then "cd dagger" (again without quotes) to get into the folder (cd stands for "change directory"). Now you'll need to type the file name of the patch, which is dag213.exe. This will start the patching process. The patch might ask whether you want some features installed or not (like FIXMAPS), to which you should answer Yes by pressing Y on the keyboard.
Hopefully this is not confusing!
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