The going is difficult for the dwarves, Bilbo, and Gandalf as they do not have enough food and the terrain they are passing through is dangerous and difficult to navigate. Gandalf is concerned they will miss the road which leads to the Misty Mountains. They need to pass through the Misty Mountains in order to reach Smaug and the treasure he has taken from the dwarves.

The party is tired and hungry, but Gandalf has made arrangements for them to stay with his elf-friend Elrond, who lives in the Last Homely House. After following a rugged trail marked only by white stones, they come across an elf village. The elves and dwarves do not always get along, because the elves tease the dwarves about their beards and the dwarves think the elves are inferior to them. While the elves do tease the dwarves a bit, they also help them find their way to Elrond's home.

They stay with Elrond for fourteen days, enjoying his hospitality and gaining strength to continue their journey. Elrond is also able to translate the runes on the swords they took from the troll's treasure. He tells them the swords once belonged to the Elves of the West and were made in Gondolin for the Goblin-wars, one of the swords is named Orcrist and is a well know sword, the other belonged to the king of Gondolin.

Elrond then looks at the map the party has brought with them and notices it is written with moon-letters. These are letters written by dwarves that only are legible in the same moonlight in which they were written. The letters tell them to enter the door to the mountain on the dwarf New Year. The next day the band of adventurers leave to continue their journey.

They travel up and around the mountain for days and days and one day encounter a thunder-battle. A thunder-battle is more than a thunderstorm, it is when storms from the East and West battle each other. The stone giants throw rocks down the mountain and the dwarves cannot find a safe dry place to wait out the storm.

Thorin decides to send dwarves, Fili and Kili, to look for a safe dry place to spend the night. They report a cave is located not too far away which will accommodate everyone. The group makes their way into the cave and eventually go to sleep, but Bilbo has nightmares which wake him up. This is a good thing, because he sees a crack opening in the back of the cave and calls out to the others.

Goblins come through the opening at the back of the cave and capture everyone, except Gandalf who uses his wand to kill a few goblins, as he escapes. The goblins take the dwarves and Bilbo to their leader, so he can decide what to do with them. The leader, Great Goblin, doesn't like Thorin, because his people were instrumental in winning the Goblin-war. He is even more incensed after he sees the Orcrist, the Goblin-cleaver, hanging from Thorin's waist.

Just as all seems lost, the lights go out and a sword kills the Great Goblin. The dwarves hear a voice telling them which way to go to escape their captures. They follow the voice, who they find out is Gandalf, and traverse through tunnels in an effort to leave the mountain. The goblins pursue them and by sneaking up on the dwarves, manage to grab Dori. Bilbo who is riding on Dori's shoulders falls off and hits his head rendering him unconscious.

Bilbo awakens in a dark tunnel and is not able to see where to go, to escape to the outside world. As he crawls along the tunnel, his hand feels something cold and metallic; it is a ring. Bilbo puts the ring in his pocket and continues on his way down the tunnel. He eventually walks into an underground lake, which he is unwilling to try to cross, because he doesn't know how to swim and he is afraid of the creatures which may live in the water.

He doesn't know it, but he is being watched by a creature named Gollum. Gollum lives on an island in the lake, he is mean and talks to himself all the time. He calls himself preciousss and hunts fish, goblins and any other type of meat he can find to eat. He approaches Bilbo, because he is curious as to what he is and why he is in the tunnel. The two of them play a riddle game, which comes with high stakes. If Gollum wins the game, he can eat Bilbo, but if Bilbo wins then Gollum must show him the way out of the tunnel.

Bilbo wins by asking Gollum to tell him what is in his pocket. The answer is the ring, which unbeknownst to Bilbo is magical and belongs to Gollum. The ring makes the wearer invisible, this comes in handy for Bilbo, because Gollum is intent on eating him, instead of keeping his end of the bargain.

Gollum realizes his ring is missing and then he realizes Bilbo must have it. This turn of events greatly distresses Gollum, which causes him to reason that Bilbo must know how to enter the part of the tunnel the goblins live in. Bilbo follows Gollum to this area, but must hurdle over Gollum to enter the goblin area.

Once there the goblins see Bilbo, because the ring has slipped off his finger. He puts it on and through stealth and sheer determination manages to escape to the outside world.

Bilbo and the rest of the party are captured by goblins, but they are rescued by Gandalf. Bilbo finds himself alone in a dark tunnel and he discovers a magic ring. Bilbo once again surprises himself with his resourcefulness and courage, when faced with trying circumstances.