Sorry for the delayed response. I've been quite busy. I try to restrain how much of my desires for Chitinous Carnival I share. Content doesn't work out, plans change, things take longer than expected to develop, etc. However, I will try my best to answer these questions:
1a. What is the 'goal' of this game?
The 'goal' of Chitinous Carnival will be to either "escape" the carnival or join it. Escaping can be done by using up all your tickets and leaving. Joining the carnival can be done simply by letting it pull you in.
1b. What major choices and flags would they handle?
Flags will track which scene the player has seen, which they have failed, which ones they have passed, and which ones they avoided.
2a. How would stats reflect choice and gameplay?
As you note, the big two will be Moral and Lust. Moral will be the stat that causes scenes and dialogue options to change the most. Lust will present additional options or, in some cases, force the player down a path. Intoxication servers as a way to tip the scales. Attention relates to NPC frequency.
2b. How would infested mind and body parts show...?
Infested body parts will be limited to the player inspection menu and birthing scenes. Implementing infested body parts for every single possible event would be an insurmountable task.
2c. Would the environment change the further the game rolled out?
I don't have plans for dramatic changes in scenery. However, I have plans for carnival games to present a corrupted version of themselves.
3. What is the friend's role in this game? How would he impact the game?
Mechanically, he servers as a way for the play to deflect the event. I'm still refining the details, but he'll play into changing the Morality stat.