I love the design of the creature as well, it manages to have quite a startling expression without using too much human means to do it. You took good advantage of the C64 tones to create your own quirky atmosphere. I also see good progress in the folds
That was a good point Indigo made, follow his advice...I'm just gonna pick out little things that sticked out to me.
personally I'm not really sure of the lastest interpretation of the folds, specially the way they wrinkle as they touch the ground.
Looking at your sketch, you captured well how when it touches the ground, the cloth created creaces that made the cloth directly above the ground sort of puff up a little, you made very decided and strong lines that describe exactly how the cloth sort of turned on itself and went below the the clothed figure to create those puffed up creaces.
However, in the actual sprite the cloth that is about to touch the ground just seems to sort of float for no reason, the creaces close to the ground arent clearly specified.
Also, in the sprite it looks like he's got a type of sleeve for his right hand, and a different one for the left one...I'm not quite sure why the sleeve closest to us looks so inflated when his arm is so thin.
Also, with the first picture you posted you seemed to have a difference in the amount of white used in his wet bulgy little head at the top, while the shirt didnt have as much bright white highlights. Now they sort of hold around the same amount of white and this sort of reduces the impact of the freaky texture on his head, while making the shirt look all the more unlikely.
Ok now, with all the crit out of the way let me say this is probably one of my favorite things ever posted here, and in the internet in general, this is going to my favorite pics folder =)