The disclosure of AI art implementation for this episode was not required when the game was released (I think Steam required the declaration of AI usage approximately from 2024 and onward, and this episode was released in June, 2023). This episode was actually released on Steam before the first two episodes.
As for the input lag that you mentioned. I don't think it has anything to do with being unresponsive (I checked the game on my two PCs and never had any issues with the controls). There are just standard restrictions on the main character (like not being able to move left or right while crouching, I think it is reasonable to expect that you need to stand up before starting to move).
Lastly, when it comes to copyrights, I asked the creator of this game (Allen Pilgrim) for a permission to do a remake, and he agreed as long as I give full credits to all the people that were involved in the development of the original. So as far as I'm concerned, there are no legal issues.
I also don't really understand what you mean by "Xargon-Inspired" characters. There are only two main characters in the game (the player and the eagle, while Xargon is just the final boss). So it is not like the game has a lot of characters to begin with.
Regards.