1) Party Makeup?
There is a Paladin/Knight of the Chalice (specializes in fighting demons), Fighter/Barbarian, Monk/Sorcerer, Cleric, Cleric, Fighter/Wizard, Wizard/Incantatrix, and Bard/Virtuoso.
2) Is the party aware they will be fighting a dragon?
Yes.
3) Will the party encounter the dragon in its lair? If not, where?
The dragon is not in its lair, he is in a place in the positive energy plane where he is currently feeding on souls. The players know exactly where he is and he knows they're there as well. The only thing the dragon doesn't know is when exactly the party is going to come and get him out of his location, so he'll probably only get a few rounds of prep time. The party obviously will get a little more prepping time once they figure out how to get into the location the dragon is now holed up in.
The location in which the battle will take place is somewhat confining to the dragon IMO, only 100 ft. high and approximately 130 ft. diameter across. Not alot of space for arial manuevering so I think it will be more of a close range fighting and spells with concentration checks.