It is inside Stone's flying fortress, in the Inner Passage which leads to Xanlosch and Isabelle. There is a short hallway with a chest at the end, with a statue of a demon, or something, in the main hallway pointed at the chest; opening the chest triggers a trap:
fireballs shot from the statue, which can be avoided if you open the chest standing close to either wall, rather than standing in front of the chest.
If you have not found the far end of the passage, you can look for the only anti-dragon shield in the fortress to find the near end, fly to that section of the fortress and drop down. There is a higher section of the platform you can land on to get ready for the encounter, so you are not dropping directly into a cutscene and fight (IIRC there are a couple regular opponents outside the fortified section where Xanlosch waits, though).
