Yeah, you kind of gathered that! Looks like the MUBG-weilding demon cupcake got to her and they combined and modified themselves into some kind of... CAKEDOS. And boy, do they seem pissed at you.

For a moment you try really hard to manually control your dreamscape and unimagine the monstrosity from existence, but it just keeps on attacking you with its very real-looking needles in response. Looks like you're not going to be able to simply believe your way out of this simulated nightmare.

It doesn't help that you are both completely terrified, which is clouding your thoughts and probably has something to do with the emotional effect that Padget3333 was telling you about... but to be fair, terror also seems like a fairly reasonable reaction to the situation. Oh well, time to channel that fear into some FIGHT or FLIGHT, but mostly FIGHT!