It hasn't occurred to me to be concerned about my dragon form; should I be? It has gotten the job done in those few aerial battles I've had so far.
I loose no health as a dragon. I keep losing a chunk of health whenever I am in my Battle Tower, though, with no means of healing myself until I get outside (for some reason I can't drink potions or use magic inside my own home). I'm wondering if this is a minor bug, or a side effect of the gigantic poison cloud that wraps the island? Whatever it is, it doesn't seem to pose any danger; I haven't actually bled out or anything.