I think the Sapphire is in the Rocket Lab on Five Island. But first you have to go through the Dottted Hole on I think Six Island to get one of the passwords, or it might be for both of them, I haven't played my FR in awhile.
You have to use Cut on the entrance to the Dotted Hole. Fall in the holes in a pattern. But the scientist will take away the sapphire. He'll give you the other password to the Rocket Warehouse. And then you can enter it and fight the Scientist for it.
HOW many times have I given you the link to the FR/LG FAQ? Your question is answered right in there. Actually READ it this time, PLEASE. It was written to prevent loads of threads being made on the same subjects.