The dwarves and Bilbo are sealed in a tunnel in the Mountain, with no hope of escaping through the secret door. Time passes slowly for them, because they are in complete darkness with little air. Thorin declares they must try to find a way out of the Mountain.

Smaug has not been heard from since he declared he was going to make the people of Lake-town pay, for helping Bilbo and the dwarves. Bilbo decides he will lead the dwarves through the tunnels to the cellar where Smaug lives. He leads them in the dark to the cellar and then stumbles into it, because he cannot see where he is going. He notices the red light, which usually emanates from this area is gone, this is because Smaug is not in residence. Bilbo asks for a light from the dwarves and is given a torch to illuminate his way around the cellar.

The dwarves will not accompany him in the cellar, because they are afraid of Smaug returning and capturing them. Bilbo, meanwhile, explores the treasure stacked high in Smaug's lair. He finds the Arkenstone, the Heart of the Mountain, which is the most cherished jewel of the dwarves. Instead of giving it to Thorin, he puts it into his pocket and decides to keep the discovery to himself.

A bat comes near Bilbo, causing him to drop his torch leaving him in complete darkness again. He convinces the dwarves to bring him another light and to enter the cellar. There they explore the treasure, taking what their pockets could hold, wearing armor, and seizing weapons. Then they decide it is best to leave the Mountain and Thorin leads them out through the Front gate. Balin takes them to an unused look-out post to rest.

The group is still wondering where Smaug is, but two days before they made their escape he told them he would take revenge on the people of the Lake-town or Esgaroth, as he calls it.

The townspeople had seen Smaug approaching and through the urging of a man named Bard, took actions to prepare for Smaug's attack. They cut the bridges, gathered arms and watered down the village. Smaug is greatly annoyed with them, because he has not been challenged like this by anyone for an age. His anger grew as the men used their bows and arrows to defend themselves. He managed to set the town on fire, causing the people to take to their boats or jump into the water. The Master of the town was one of the people taking to boats to escape from the dragon.

Bard stood his ground and fought, a thrush, the same one which irritated Bilbo, told Bard where to aim his bow and arrow, so he can hit the vulnerable spot on Smaug's chest. Bard shot his arrow toward the spot and killed Smaug.

The townspeople wanted to make Bard their king, but the Master would not allow it. Bard in the end, decided to help the Master until he could gather enough men to help him retrieve the treasure in the Mountain.

The Wood-elves come to help the townspeople and also to join some of the men on a journey to the Mountain, in an effort to retrieve the treasure. Others had also heard of the death of Smaug, such as the goblins and Beorn, so they all had notions of taking the treasure, because they think the dwarves are dead.

Meanwhile, Bilbo and the dwarves are noticing the birds are gathering in greater numbers than before. Thorin thinks this means something is happening, but he doesn't know what is occuring. The thrush returns to talk to them, but none of the party can understand what he is saying. He brings a raven to them named Roäc, who can talk to them. He tells them of the death of Smaug, and about the elves and Lake-men, who are coming to take the treasure. He advices them to deal with Bard, because he is a man who can be trusted and is fair.

Thorin is angry at the thought of others trying to take his treasure and tells the raven they will defend it against anyone. He asks the raven to bring him news of what is happening. He also requests that the raven find and ask Thorin's cousin Dain for his help in defending the Mountain.

The dwarves and Bilbo secure the Front Gate of the Mountain and send Fili and Kili to retrieve the ponies and provisions which escaped Smaug. The elves approach the Front Gate, but leave after finding out that Thorin and the dwarves are guarding the treasure. Then Bard approaches the Front Gate, he asks for a share of the treasure, as compensation for the ruin of his town and the aid they provided Thorin and the others. Thorin refuses to give them the treasure they seek, so Bard tells him they are under siege. He will not fight them, but instead he will not allow provisions to enter the Mountain.

Bilbo and the dwarves are able to secure the treasure after Smaug has been killed by Bard, but they are in a state of siege by the Lake-men. They are being given information by the raven Roäc, who is called to duty by the thrush, who has been listening to what Bilbo and the dwarves have been talking about. Bilbo is upset, because he thought once Smaug was dead and the treasure was found then the adventure would be over, but instead he finds himself in a new predicament.