I had a hard time too, but I didn't lowered the difficulty this time, playing on nightmare and I was level 22
And I did it the same way, with my bow.
In dragon form I'm to slow to react fast to evade the fast attacks of Zagan and the other flying demons ! The only thing I did in dragon form was trying to destroy the Nests as fast as possible, but if I didn't change fast enough back in humon form I was killed again ...
Next time I must think about it to take a stronger bow with me so it goes a little bit faster
If Zagan is killed there is never a lootbag, so that's normal
In the chest I found 1 piece of equipment for my dragon (the Chainmail Dragon Helmet with the skill Firesphere).
Maybe that's the one Zagan thougth about when Mindreading him ?