Sorry it took me so long to get around to posting a review for this--I've been meaning too for a time but a week long move, two more weeks to get solid internet and starting a new job kept me occupied. Here's my thoughts.
I'll start with positives.

You did a good job of providing believable and rational motivations for the narrator. The passages about his father's conscription, the soldiers tramping his brothers, then beating him and taking him away gets our sympathy almost immediately. After the narrator survives a monster attack (and presumably is affected with whatever were-version the monster was) and starts killing people, we haven't completely lost sympathy for him yet.
By the time he's killing the children of the man who sent the soldiers to conscript his father we've lost sympathy for him but at least understand why he's doing what he's doing, even if we find it repulsive. So overall you did a good job of introducing a sympathic character, showing his descent into a monstrous being, and how the wrongs done to him before he gained his evil power guided his evil actions after it. Pretty much what you intended, I'm sure.
Finally, this read very much like the books or letters you'd find scattered around Morrowind in various TES games--bits of lore (usually focusing on a specific monster, race or historic event) as told through the eyes of a normal Tamriel inhabitant. So, that worked well for you.
Since this is written very much stream of consciousness with the narrator delivering the letter in first person, I'm not really going to comment too much on the grammar or how things were put together. The only things I really noticed were the tendency of the narrator to run on for quite some time in the same sentence--while this works fine if spoken, it does jar a bit if you're under the assumption it's written. I'd break up the longer thoughts wherever possible without ruining the flow. Using shorter sentences will also let you emphasize important thoughts.
The next thing you mentioned was to read the Daggerfall quest if people weren't familiar with it. I think this might be asking too much. If possible, I'd try to work any pertinent information into the letter itself--people are less likely to go and research the origins of your story unless they're really, really interested in it. :0 I'd find a way to summarize the critical plot elements you're expecting the reader to already be familar with here (from the quest) and work them into the narrative. That way, playing Daggerfall or knowing the quest isn't necessary. Assume the reader doesn't know anything going in and give it all to them in a few concise lines.
As your next step, I think you could cut down the introduction a bit. The narrator spends a great deal of time rambling while you're really just trying to establish the important stuff--he was beaten and abducted by soldiers, he saw his brothers ridden down by those same soldiers, and his father was conscripted to join the army, while he never saw his mother and sister again. He was sent to a temple where he studied for a time, but the traumatic experience left him scarred and emotionally damaged. All that's great and works well, but you spend a little too long working it in. I think I know what you're doing with establishing the thinking of your narrator and giving us a feel for him by how he speaks, and for the most part it's good--I just think you might be doing too much of it. I feel like you've already tried to cut this down, but I'd cut it down even further if possible. Get to that monster attack at the temple more quickly--that's when the story really peaked my interest. When cutting down my own stuff, I find it very useful to set a maximum word count (usually less than what I end up with) then eliminate until I reach it. It's amazing what you find you can live without after completing a first draft without fundamentally changing the story.
As far as the story being told through the letter itself, I think single biggest problem you currently have is that the nature of the monster into which the narrator has turned is nebulous. To give you the progression of my impressions of it, at first I simply assumed the narrator and his temple brothers had been attacked by a werewolf--the mention of claws, teeth, and feral animals gives that impression quite clearly.
"A ravenous beast came to upon us during the night while we prepared the livestock for the sacrifice within the temple court. The smell of the blood must have attracted him, but whatever the cause it was cruel irony that as the animals could do petty little to resist our putting the knives to their throats, we could do petty little to save our throats from the ripping jaws."
The first mention of the beast's activities diverges from the impression of a berserking, feral beast. However, later passages imply something far different. In particular, this passage...
"Within the week it happened. Come night, I became. No horror or spectre, only me. "
The words horror and spectre conjure something undead or ghostly (at least to me). If the narrator is a werewolf, I'd expect phrases like 'wild dogs', 'mad animals', and so on, something violent, feral and alive. This and the idea of moving silently throughout the town, unheard by the guards, make me think of something more ghostly.
The part describing the slaughter of the guardman's wife and unborn baby is even more confusing.
"My earlier howling surely caused a stir, guards indeed ran with torches house to house but I wasn’t there."
Still thinking werewolf here.
"In this place there is no sound."
Now you're getting a bit too confusing. This place refers to the house where the mother and baby are? Someplace else? I think you're going too far with your poetic language here, to the point where it confuses your readers.
"Her mouth released her gentle nature with a gasp and he was concealed in my belly."
The first thing this made me think of was the narrator sucking the woman's soul out through her mouth, like a mummy or undead. I'd expect a werewolf to just rip her apart, so again, I find myself questioning what type of monster I'm being told about. The fact that I don't have a clear idea of what the monster is continues to distract me as I read on through the story. So, I think in this part you might be allowing the narrator to get too poetic with his language for his own good. I'd revise it to make several things clearer...
1) More clearly establish what type of monster the narrator has become.
2) More clearly establish how the woman and her baby are slain.
3) Make sure all the narrator's language seems fitting with actions a werewolf would take and impressions of what people seeing a werewolf would witness (teeth, claws, fur, shadows, glowing eyes, snarling, drool, etc).
Eliminating the ambiguity should prevent people (or at least me :0) from being distracted by it.
"Moons and howling, release and the break. No, we don’t howl at the moons. They are simple faces above, forsaken sons of the sun found unworthy to stand at his side. "
We're definately back to werewolf here, no mistaking it.
"The wings of the night carry me again to my prey and soon their clawed remains decorate my lair. Oh yes, my lair. Seemingly taken for granted, it never occurred to me before why I would keep one. Glory. Honor. A legacy of my deeds most noble. That a pond could reflect who I am, the moons would hide for shame!"
Now I'm confused again. Wings of the night carrying the narrator? I've never heard of a winged werewolf, so this makes me thing he's a gargoyle, demonic thing or even a dragon. The idea of him maintaining a lair also suggests such--don't werewolves normally hunt for food, tear it open, and move on during their hunts? When I hear lair I think of a dragon gathering trophies and gold. So again, I'm confused about what the narrator is and it's distracting me from the story.
Again, I think you're biggest problem is allowing the narrator to get too flowery with his own language, or perhaps incongruencies in Daggerfall/TES specific lore that aren't immediately apparent when regarding werewolves (for which you have to acknowledge there is already a ton of established beliefs about). I'd just do a self check anywhere you're being poetic and make sure you're not sacrificing clarity for interesting word flow.
That's pretty much all I have, since this seems intended as a stand alone 'slice of life' of the narrator. an interesting read that could benefit greatly from a bit of trimming and some work done to eliminate ambiguity caused by the narrator's language.
And, as always, this is just one guy's opinion. Hope this helps, and thanks again for your critique! Now that I'm not as busy I'll try to be more prompt in the future. :0