Right; let’s recap a bit what we know about these ANOSPHULY.
The dragon (and I’ll still call it a dragon in this post, though I’m increasingly skeptical about its nature) is trapped inside a circle of ANOSPHULY. The circle constrains the dragon, but is apparently coarse enough to allow the PC to dash inside and stab the dragon:
You SKIAL across the circle and DOGON your sword in the dragon’s BORM.
We know the dragon is constrained, because it tries to attack us, but can’t:
The dragon (wakes?) with a howl! It throws itself at you! But it twists away from the ANOSPHULY DREIP, KIREMO their UPHOLSTO.
The dragon is capable of casting spells that shatter swords and knives, so presumably these ANOSPHULY are quite robust (thick stone columns, e.g.).
The ANOSPHULY contain POLISHY:
Each one bears a few POLISHY APPLE LERULI.
It is unclear whether these POLISHY are natural (mushrooms, crystals, moss, etc.) or were placed by the dwarves to trap the dragon. What is clear is that the dragon “twists away” to avoid touching the ANOSPHULY, and that moreover these POLISHY are deeply damaging to the dragon:
The dragon twists away out of the deadly ORHELN, but it cannot avoid the shards which SCARN all around it. PURLY of small wounds RUBUC flame.
We threw shards of a shattered knife at the dragon. Now, I can believe that a well-weighted throwing knife could conceivably hurt a dragon, if thrown by a trained adventurer. Small shards of a knife? It seems here that whatever we coated the knife with (made from the POLISHY) is so harmful to the dragon that light contact with flying shards is enough to open wounds on the dragon which then catch fire(!).
Coming back to the original passage,
But it twists away from the ANOSPHULY DREIP, KIREMO their UPHOLSTO.
We can be very confident that UPHOLSTO is the present participle of UPHOLSTER (there are some Lionese words that end in -O but aren’t participles; however, since UPHOLSTER is attested in the text, surely that’s not what’s going on here.) Since the ANOSPHULY contain POLISHY that greatly damage the dragon, KIREMO likely means “avoiding” or “escaping” or some similar verb.
What could UPHOLSTO mean, then? The most tempting words here aren’t participles (“touch”, “reach”, etc.) But I think UPHOLSTO is somehow related to physical contact?