Daggerfall requires MSCDEX version 2.23 or later in order to run. You can get this version from our website: http://www.bethsoft.com.
The message you are getting is due to the incorrect version of MSCDEX. You must have MSCDEX v2.23 or higher. Type MSCDEX at the DOS prompt and the version will be displayed. If you go to the Bethesda web site (http://www.bethsoft.com) and select DAGGERFALL and then tech/patches there will be an MSCDEX button you can click on which will download the correct version of MSCDEX. Delete and reinstall the game after you have updated MSCDEX to the correct version.
I downloaded MSCDEX but it's complicated. Anyone know if there's a way to just get the installed Betony demo from somewhere?