The company encounters Radagast the Brown, a wizard who lives in Greenwood. He tells them of an encounter at DolGuldur with aNecromancer who has been corrupting the forest with dark magic. The company is chased by Orcs on Wargs, with Radagast covering their escape. Gandalf leads the company through a stone passage to Rivendell as the Wargs and Orcs are slain by Elven riders led by Lord Elrond. Elrond reads Thorin's map and discloses that the Lonely Mountain has a secret door which will be visible only onDurin's Day. Gandalf talks with the White Council consisting of Elrond, Galadriel and Saruman the White. He tells them about his involvement with the Dwarves, presenting a Morgul-blade Radagast obtained from DolGuldur as a sign that the Necromancer is linked to the Witch-king of Angmar and may attempt to use Smaug. Saruman is skeptical, not believing the Necromancer to be a true threat.
Without Gandalf, the company journeys into the Misty Mountains, where they find themselves amid a colossal battle between StoneGiants. They take refuge in a cave and are captured by Goblins, who take them to their leader, the Great Goblin. Bilbo becomes separated from the Dwarves and falls into a cave where he encounters Gollum, who accidentally drops a mysterious ring while killing a stray Goblin to eat. Pocketing the ring, Bilbo finds himself confronted by Gollum, who is initially deterred from attacking Bilbo because he wields an Elvish blade. They play a riddle game, wagering that Bilbo will be shown the way out if he wins or eaten by Gollum if he loses. Bilbo eventually wins by asking Gollum what he has in his pocket. Realizing that he lost the ring, Gollum suspects that Bilbo possesses it and attacks the hobbit. Bilbo discovers that the ring grants him invisibility and evades a furious Gollum.
Meanwhile, the Great Goblin reveals to the Dwarves that Azog, an Orc war-chief who beheaded Thrór and lost his forearm to Thorin in battle outside the Dwarven kingdom of Moria, has placed a bounty on Thorin's head. As the goblins search Thorin and company they reveal Thorin's sword,Orcrist the goblin cleaver. The sight of this drives the Great Goblin into a fury, who then orders the goblins to attack and behead Thorin and company. Gandalf arrives just in time and saves the Dwarves from the Goblins, killing the Great Goblin during their escape. Meanwhile, Bilbo evades Gollum in the deep of the mountain using the ring. He eventually comes upon an exit and Gollum nearby, but rather than kill his pursuer, Bilbo spares him and escapes out of the mountain. Bilbo rejoins the group, keeping the ring he found secret. Ambushed by Azog and his hunting party, the company take refuge in trees. Thorin then challenges Azog, but is defeated and knocked to the ground by his mace and set upon by his warg. Bilbo saves Thorin from the Orcs just as the company is rescued by the Eagles who fly them to the safety of the Carrock. Gandalf heals the unconscious Thorin who acknowledges Bilbo's bravery. In the distance, the company sees the Lonely Mountain. The company also see a thrush flying about, which then heads to the Lonely Mountain. There, the thrush catches a snail and knocks its shell against the mountainside, awakening the sleeping Smaug, who is lying beneath a golden hoard.