In the original patch, lava demons are only generated in the Convict quest. Five lava demons appear on the goal level, at the points of a pentagram formed from lava tiles, with the quest nemesis, Warden Arianna, waiting in the center.
In SpliceHack, lava demons also appear in Mephisto's Lair.
In EvilHack, lava demons are tameable. There is a very small chance that a tame lava demon can be summoned as a side effect of dipping items in forges.