Daggerfall NPCs is one of my favorite mod, however there are several issues that I found needs some fixing:
1. Some generic names which were appropriate in original Daggerfall game are not in Oblivion. For example you can encounter a Knight, a Healer or a Pilgrim and they will attack you on sight. I felt it is not right. Now depending on faction they are in, all Daggerfall NPCs will get "Bandit" or "Marauder" prefixes, so there will be Bandit Healer, Marauder Knight, etc.
2. Fixed wrong beasts skeletons causing visual glitches in the game.
3. Optionally increase level offset (by +10, can be changed inside of the script) of NPCs because I like the extra challenge, and it is more inline with another my favorite mod BOO Brasher's Oblivion Overhaul.

Download the latest TES4Edit, put this script inside "Edit Scripts" folder, load Daggerfall NPCs.esp into TES4Edit, right click on it, Apply Script, select this script from dropdown list and click Ok. Exit TES4Edit and save modified plugin.

P.S. If you would also like to use Daggerfall NPCs together with BOO, load it after BOO then use the following BASH tags in Wrye Bash and create bashed patch:
BOO (comes in several variants, I use BOO Less New Armor.esp): {Delev, Relev}
Daggerfall NPCs.esp: {Delev}