The dwarves are barricaded inside the Mountain and they are becoming bored waiting for something to happen. Thorin is ordering the dwarves to look for the Arkenstone of Thrain, because it is more valuable to him than anything else. He doesn't know Bilbo has hid it in a bundle of old cloths, that he uses as a pillow.

Roäc, the raven, delivers the news Dain and five hundred dwarves are a few days away from the Mountain. They will help Thorin's men, but Roäc also warns the coming winter may bring starvation to the group trapped inside the Mountain. Thorin retorts the same winter may cause similar hardship for the elves and men camped outside the Mountain.

Bilbo has a plan and implements it the night of Roäc's visit. He takes the Arkenstone and sneaks off the Mountain. He is discovered as he crosses towards the elf camp and is taken to the Elvenking and Bard. There he presents them with the Arkenstone to use as bargaining tool to aid them in negotiating with Thorin. They are very pleased with him and offer to let him stay with them, but he insists on returning to the Mountain.

Bilbo sees Gandalf on his way out of the camp. Gandalf congratulates him on what he has done and informs him he has news, which is not known to even the ravens. Bilbo makes his way back to the Mountain with no one discovering his absence.

The next day Bard and the Elvenking visit Thorin demanding a share of the treasure in return for the Arkenstone. Bilbo confesses he gave the stone to them, which enrages Thorin. He is stopped from throwing Bilbo on the rocks, by the appearance of Gandalf. Thorin agrees to give Bilbo his share of the fortune the next day, which is to be divided among the elves and men.

The next day Dain and the dwarves arrive at the elf camp and tell them to let them pass, but they are refused passage by Bard. While Bard is checking to see if the treasure has been delivered as promised, Dain seizes this opportunity to attack the elves and men. During the attack a great black cloud comes upon them and Gandalf calls a halt to the fighting. He points out the cloud is a cloud of bats, who are flying over an army of goblins, wolves, and Wargs. He demands the combatants come together to face this new threat.

The battle which ensued is called the Battle of Five Armies, because on one side are the Goblins and Wild Wolves and on the other are the Elves, Men, and Dwarves. The battle is fierce and the advantage swings first from the Elves, Men and Dwarves, then to the Goblins and Wild Wolves. Even with Thorin and his men helping, all seems to be lost, then Bilbo sees the Eagles winging their way to the scene of the battle. Bilbo is knocked unconscious by a rock as he points out the Eagles to his fellow combatants.

Bilbo wakes up on the rocks feeling shaky, but not hurt badly. He is found and taken to Thorin, who lays dying from his wounds. He tells Bilbo he wants to leave this world as a friend of Bilbo's, which the hobbit agrees to. Thorin is buried with the Arkenstone on his chest and the sword, Orcrist, on his grave.

Bilbo learns the Eagles fought valiantly, but eventually they were also outnumbered. Then Beorn appeared in the shape of a giant bear and killed many of the goblins, whose survivors ran away, but they were hunted down and killed.

Dain becomes the King under the Mountain and the rest of the dwarves who followed Thorin, except Kili and Fili, who died in battle, stay with him. Dain keeps Thorin's promise and gives a fourteenth share of the treasure to the Lake-men and Wood-elves. Bilbo accepts two small chests of gold and silver to take home with him.

Bilbo, Gandalf, and Beorn travel together to Beorn's home, where Bilbo and Gandalf stay for a while, before traveling back towards Bilbo's home. Bilbo is glad the dragon is dead and he is finally heading home after his adventure.

Bilbo and Gandalf reach Rivendale and the home of Elrond on May the First. They tell him and the elves the stories of their adventure. Bilbo also learns Gandalf attended a council of the white wizards, who drove the Necromancer from his home in the south Mirkwood.

After resting with Elrond for a week, Bilbo and Gandalf start the final leg of their journey to Bilbo's home. It has been a year since he left on his adventure and he is anxious to return to his hobbit-hole.

Upon arrival Bilbo is surprised to see his home's contents are being auctioned off, because he has been declared dead. He also finds his cousins, the Sacville-Bagginses, measuring his home to be fitted with their furniture. They are not all happy to find Bilbo alive and well, in fact it takes a few years for people to recognize he is alive. He also has to buy back many of his belongings.

Bilbo is considered 'queer' by most people, because he is no longer respectable, but he does not mind. One day as he is writing his memoir titled "There and Back Again, A Hobbit's Holiday", Gandalf and Balin visit him. They are both doing well and he finds out Bard has rebuilt the town in Dale.

Bilbo realizes the prophecies of long ago were right and his part in fulfilling them is a small part, which is what he wanted.

Bilbo, the dwarves and the elves fight amongst themselves and then together to protect the Mountain from the goblins. He returns home and tries to make a quiet life for himself again. He is happy to have his solitude and a few visits from friends, so he can live out his life just as he always wanted to.