1) Move your cursor over a weapon. Pick it up. Refuse to hand it over and kill all the bandits around the table.
You have to mind-read Ragon or R-someone in the camp, then the key appears on the dragon's head. You have to do this before killing Jagon, though, otherwise you can't get the stuff. It's not anything really good, though, just random stuff.
It's near where you met Lord Seth. If that doesn't help, go to the South Valley shrine and follow the road leading down to the river. Just before the bridge is wreckage from an attack. Search around there.
