I cannot access the Daphne forum/messageboard , so I'll give it a shot here. Sorry.
I managed to install Daphne, but after I die I move on to the next scene. According to the Daphne site, this is correct. And I quote:
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Q: When I die in Dragon's Lair, I move to a new scene instead of playing the same scene over again. Why?
A: This is how the original arcade worked, whether you remember it that way or not

It was a design decision implemented by the programmers. We can only speculate about their reasons.
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Frankly, I don't rememner this being the case. Either way, the DVD-Video version of DL that I own certainly doesn't allow you to continue if you die. Who's right?