thank you so much! Yep unfortunately the dungeon was the last thing we were able to implement and it had these issues; you did things the right way and got punished for it! As for the garbled dragon, he's supposed to look like that! We didn't have time to set it up narratively or visually enough, but the idea is that reality starts to crumble around the entities found in this dungeon, and I've always loved glitched aesthetics ever since I found missingno. way back in the day...
We are actively working on a polished version and it will definitely include a better cutscene and inventory/ status screen system :]
Thanks again!