If you want my honest theory, Smilebit really, really rushed the ending. I mean, would it have killed them to show us a cut-scene detailing how Orta met the baby dragon?
Anyway, seen as the baby dragon is described as an “heir”, (if I remember correctly,) my personal opinion is that it is in some way the physical offspring of the dragon. I’d like to think that the dragon’s body crumbled into energy and ashes, leaving that little creature behind in its wake.
I am positive, however, that the Heresy Program / Impurity did not download itself into another body, as it has long since been deactivated (since the end of Saga). Also, the fact that the baby dragon is with Orta suggests to me that it came into being as the previous dragon died. After all, how else would she find it? It’s certainly not the only possibility, but I don’t feel that much of a time gap is implied between the dragon’s death and the baby dragon “epilogue”.
This theory also raises the point that, if the dragon did “reproduce” in a way, it would be kind of unique. Typical Ancient Age dragons are thought to be incapable of reproducing themselves in any way - like their Drone neighbours - and so further differences in the nature of this dragon are highlighted.
My theory is that the ability to spawn an offspring - perhaps only at the point of death? - was bestowed upon the physical dragon-creature when it parted with the Heresy Program / Impurity prior to Orta. We also have the huge physical change in the dragon’s body between PD Saga and PD Orta to account for, and I believe that the dragon was morphed into its last state by the Impurity as some kind of a parting “gift”.
After all, it seems incapable of permanent growth evolution (as opposed to suitable morphing) in PD Orta, as opposed to the earlier games. If I am correct in thinking that the dragon was only evolving with an intent to reach the Blue Dragon / Solo Wing form, and that it was only morphing because of the effect the Impurity was having on it, this would all make sense, as the Impurity is no longer associated with it.
Sorry, I got onto a bit of a tangent there, but legaiaflame is right: the whole dragon-offspring thing is very mysterious…