A flashback set in the human town of Bree reveals Gandalf the Grey persuading Thorin Oakenshield to obtain the Arkenstone so that Thorin can become the King of Erebor. Gandalf mentions that a stealthy burglar needs to be recruited to steal the Arkenstone from the dragon-guarded mountain. Twelve months later, not long after the end of the previous film, Bilbo, Gandalf, Thorin and the Dwarven company are chased by the Orcs down from the Carrock, where they encounter the bear form of a charging skin-changer, Beorn. Gandalf urges the company to seek refuge in a nearby house which happens to be the abode of the calm human-form of Beorn. After expressing his hatred of Orcs over that of Dwarves, Beorn lends his horses to the company so that they can outrun the pursuing Orcs.
Gandalf departs before the others enter Mirkwood, urging Bilbo and the dwarves to follow the forest path and to wait for him before entering the mountain. After losing their way in the forest, the dwarves are attacked and captured by giant spiders. Bilbo, with the help of the One Ring, manages to free them from the webs of the spiders. However, while fighting the attacking spiders, the dwarves are captured by the Wood-elves. A romantic subplot develops between Tauriel, a female elf who is captain of the Elven guard of Mirkwood, and Kili, one of the imprisoned dwarves.
Under the cloak of his ring, Bilbo steals the jail cell keys and helps the dwarves to escape from the Elf Kingdom using empty wine barrels that float down the river. Along the way, they are attacked by the Orcs who had been lying in wait, and their escape is blocked by a large portcullis that the elves had lowered across the river to block their escape. While trying to open the portcullis, Kili is injured by a poisoned orc arrow. Subsequently, Thorin and Company meet Bard, a bowman and descendant of the original Lord of Dale, who was waiting to collect the empty barrels in his river barge. Pooling their coins to bribe Bard to smuggle them inside Lake-town, the Company are eventually captured by the Master of the Town when they try to steal battle-worthy weaponry. After Thorin convinces the townsfolk and Master that they will share in the riches of the recaptured mountain and the prosperity that will result, the adventurers receive a grand send-off. Three of the dwarves stay behind to help tend Kili, who has become gravely ill from the poisoned arrow.
Meanwhile, the Elvenking learns from a captured orc that "The One" (referring to Sauron) has returned, and so decides to seal off the Elf Kingdom to protect it from the impending evil. However, Tauriel leaves to help the injured Kili, accompanied by Legolas, while at the Lonely Mountain Bilbo deciphers the Last Light of Durin's Day clue and uses the moonlight to find the hidden keyhole that opens the secret door into the mountain. After entering, Bilbo attempts to steal the Arkenstone by himself, but is discovered by the awakened dragon, Smaug. Bilbo notices a missing scale in the dragons armor. Meanwhile Gandalf, after sending Radagast away with a message for Galadriel, knowingly steps into orc-infested Dol Guldur and engages the Necromancer in a fierce battle that ends with Gandalf's capture.
Tauriel and Legolas arrive in the nick of time to fight off the attacking orcs in Lake-town before splitting up. Tauriel attends to the wounded Kili using her healing magic while Legolas chases after the retreating orcs. Knowing that the interference of the dwarves will likely result in an attack on the town by the dragon, Bard tries to affix a Black Arrow to the town's launcher so that it can pierce the weakened spot of the dragon that was spotted by Bilbo earlier. However, he is captured by the Master's men before he can do so. Eventually, the dwarves enter the mountain to rescue Bilbo. Tricking the fire-breathing Smaug into rekindling the forge using his fiery flames, they attempt to kill the dragon by drowning him in molten gold. However, Smaug stumbles out of the mountain and takes to the air, shaking off the gold-coating, and heads toward Lake-Town to wreak havoc and to seek revenge. Bilbo asks "What have we done?" and the film abruptly ends.
Spoilers end here.
