Spoiler / fix? Long spoiler on what to do in there.
You kill the guys inside near the book cases, you do the ghost quest to get a book, its in a chest located in the 4 room chamber, wich were habited by the dead ghosts who float around you bring back the book to the library and turn in the quest, and walk to the lava area where the dragon is located, to pick up the dragon scales and also to get the cutscene this is important YOU need to mind read the dragon or you are stuck (this might be a bug since I havent found any other way to open the chest or gain the password, after the scene with the dragon you are not able to mindread him again). You mind read the dragon you taunt with Maxos a few times, and he gets hostile but make sure you mind read first to get the password for the chest to pick up his armor, and some rewards, then read from the book and he gets transformed into a human form, wich you can kill. anyways after the mindreading and all that pick up the scales, go back to the room with the 4 ghost rooms and pick up the dragons blood and open the chest with the password you had read from Amdusias when you have the scales and blood use the book and he gets transformed and you can blast or chop him to pieces, hope I was of help
Don't play when you have a mushroom phobia! o.O xD