HunchBluntley: An easy way to increase the draw distance is to run [url=http://en.uesp.net/wiki/Daggerfall:Files#Game_Utilities]the EyeOfArgonia utility[/url] (which is included in the DaggerfallSetup package linked at the top of that page).
Greywolf1: Eye of Argonia clears away the fog limiting the viewing distance in Daggerfall. The fog was introduced by the developers to improve the peformance of Daggerfall on slower PC's (at the time, Daggerfall was running smoothly only on high-end PC's!). Eye of Argonia doesn't improve the resolution, nor does it improve what you see close to where you are, for example in dungeons.
A word of caution: According to user reports, Eye of Argonia requires the detail setting to be at max to work. For whatever reason, it won't go back to max after you've changed it manually (almost, but not quite). The same reports say that the current detail setting is also stored in the save games. The advice is not to touch the detail setting at all, install Eye of Argonia (or use the installation procedure provided by DaggerfallSetup), and then either start a new game or load a game that was saved with max detail setting.
Alternatively, you can clear away the fog manually (by hex-editing a certain file).
For more details, search the internet for "Daggerfall Eye of Argonia".
The only way to really improve Daggerfall visually I am aware of is to use Daggerfall Unity or DaggerfallXL. Unfortunately, both don't contain the full Daggerfall. Daggerfall Unity is under active development, DaggerfallXL doesn't seem to have received an update for several years.
On the other hand, I'd be surprised if a lot of players have completed the main quest of Daggerfall or have the patience to do so, and for the others both new graphical frontends enhance the look of Daggerfall nicely.
OP didn't ask about improving graphics or resolution, though -- he specifically asked about draw distance. ;)
Obviously, replacing the original graphics engine with a more modern one would accomplish the same thing incidentally while giving all kinds of broader benefits, but, as you said, neither of the extant projects of that nature is usable for playing the full game (and who wants to "just" stick to the main quest in an Elder Scrolls game? :P ).
(And yes, EyeOfArgonia has to be applied to a specific savegame, and it makes the detail slider look [url=http://wiwiki.wiwiland.net/index.php?title=Daggerfall_:_Am%C3%A9liorer_la_distance_de_vue]crazy[/url] [see screenshots at bottom of that page], but as long as you don't mess with that slider, it works fine, and its effect carries over to any descendant savegames, too, so you can still use the ol' "save early, often, and in multiple slots" method of savegame management without having to apply the utility repeatedly; you'd only have to run it again after starting with a new character, AFAIK.)
