As I mentioned earlier, I think this is the scariest sequence in any Disney animated film. It is beautifully set up and there's even humour to start with.
The audience has already learned through Jiminy that the boys turn into donkeys. So when Lampwick grows long ears, the audience can concentrate more on Pinocchio's reaction than on the ears. The film makers didn't want surprise to step on Ollie Johnston's great reaction shot where Pinocchio pushes away the beer. There's more comedy when Pinocchio tosses the cigar.
Pinocchio's lack of empathy for others comes across when he laughs at Lampwick's predicament. It's only when Pinocchio's laugh comes out like a donkey's bray that he realizes that Lampwick's problem is also his own. Lampwick is oblivious to his own condition and only begins to realize it when his own laugh turns into a bray. From this point forward, Fred Moore gets to do the most dramatic animation of his career and he does a brilliant job. First, Lampwick tentatively feels his face. His sense of touch isn't enough to convince him. It's only when he pulls down his ears and sees them and then rushes to the mirror that the full horror of what's happened to him sinks in. Shot 14 is Moore's last and he perfectly captures Lampwick's panic as he madly scrambles around the room trying to make sense of it. Then Lampwick turns to Pinocchio, begging for help and even asking for Jiminy's help. Lampwick's clasped hands, his crawling on his knees, his desperate, begging advance on Pinocchio is very powerful animation.
I don't know if Bob Youngquist or Milt Neil animated Lampwick's hands turning into hooves in shot 16. The animation itself is nothing out of the ordinary, though the shaking is a nice touch. However, the context that it's in, preceded by Moore's portrayal of panic and accompanied by Ollie Johnston's horrified Pinocchio reacting, makes the shot incredibly powerful. We're watching Lampwick's humanity vanish in front of our eyes. Like Alexander, Lampwick's last words are calling for his mother. His bravado, his defining characteristic, doesn't survive his transition.
Milt Neil shows Pinocchio reacting to Lampwick and then Milt Kahl steps in to portray the beginnings of Pinocchio's transition. Kahl doesn't get as much footage as Moore as the audience already knows the process and it can be shortened, but Kahl is every bit as effective as Moore in conveying the panic that arises. Note how effective the simple addition of a line under Pinocchio's eyes changes his emotional state.
Don Towsley animates Jiminy's frantic return to lead Pinocchio off the island. Rescuing Pinocchio is Jiminy's chief act in the film, enabling Pinocchio to finally become an active character and develop a conscience of his own.