You can get Cromwell the smith to forge the dragon scales into some nice leather armour. He's in the Docks district; his smith is marked on the map.
The best longsword you can get at that stage would probably be the Blade of Roses +3, which can be bought from the Copper Coronet after freeing Hendak and killing Lehitnan. The other decent sword that is (kind of) readily available is the Dragonslayer +2, which can be found at the Windspear Hills dungeon.
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