Outside Floatsam, I ran into an elf woman being harassed by the guards as a spy. Being the amicable monster-slaying gentleman that I am, I volunteered to check her alibi in the nearby cave. Six game over screens and a gaggle of irritatingly large Necker swarms later, I found the bodies, and the indication was that they were killed by Iorveth's Squirrels (I'd use the proper name, but I doubt I could spell it correctly).
Since this cave seemed to lead to under Floatsam's leader's house, I assumed it was a set-up, went back out through the cave, and lied to the soldiers about what had happened to their friends. They paid me and left, and Malena thanked me for taking her side, indicating an intention to see just how "different" Geralt really was, and that I should "meet" her at the Waterfall in the forest.
Thinking I was about to get a taste of inter-species romance, I made my way (again, 5 game over screens and many dead Neckers later) to the Waterfall only to rudely discover, Malena really was a spy, and that, furthermore, she had set up another ambush for me. As her Squirrel buddies leapt out to gank Geralt, a pack of Drowners leapt out to gank them, and I decided, 'what the hell', and chased the fleeing Malena. I was able to keep up with her for a while, but suddenly, outside the insane asylum, Geralt got dragged into a cut scene, and when it ended, Malena was nowhere in sight.
The quest has now updated to "Find Malena", but there is no quest marker on the map. Where did that two-timing elf spy get off to?
Best Answer
Here is a video showing exactly where she is. It's easier to just watch the video to find malena but basically go away from the waterfall along the path leading back to the village, then make a left along a SHORT path, then make a left again on another path that heads south west sort of. You'll see a cut scene with some guy asking for help, then you fight some monsters, keep going up by the broken wall after you fight them, she is hiding behind the wall, watch out for the traps.