On the same night Smaug blocks the side entrance to the Lonely Mountain, he flies out to Lake-town. Some of the men in the town are out walking, and they notice strange lights coming from the Lonely Mountain in the distance. One of them says that it must be Thorin, back at work mining gold. Another, a grimmer fellow, says that it is probably Smaug out marauding. The others tell him to think about something more cheerful for a change. They then see a golden glow near the head of the lake, far away, and some say that the rivers are running golden now that the King beneath the Mountain has returned—but the grim man runs to the Master, crying out that the dragon is coming. Alarms sound and the bridges are flung down. Because of the man’s warning, Smaug finds the townspeople armed and ready when he arrives.

Smaug flies over the town, angry that the people are daring to fight him. The lake provides a moat that makes the attack difficult, so he flies over again, looking for vulnerability. He is met with a hail of arrows. This enrages him, and he spits fire down on the town. He watches gleefully as it burns, and he feels giddy with happiness as he imagines chasing and eating the last survivors. To his surprise, however, the people do not give up. The grim man, Bard, runs back and forth urging people to fight on. Even as the town burns around them, he and a few brave archers continue to fight.

When Bard is down to his last arrow, he hears a fluttering, and a thrush lands on his shoulder. It speaks, and to his surprise he can understand its language. It tells him about the hole Bilbo saw in the dragon’s armor. Bard shoots his last arrow straight into that hole. It disappears into Smaug’s flesh. The dragon shrieks and falls down dead on the town, which sinks with him into the lake.

Most of the town’s people had climbed into boats to escape the dragon’s attack. Their boats survive, as do their fields and animals. These people are lucky—but they are also angry at the loss of their homes. They turn on the Master, who abandoned the town almost immediately. The Master tells them that they should be angry at Thorin and the dwarves, who are responsible for angering the dragon. Bard says this is ridiculous because Thorin and his companions are probably dead. However, the mention of the expedition reminds him that the dragon’s treasure is now lying unguarded beneath the Lonely Mountain. He resolves to get it if he can and rebuild Dale. In the meantime, he claims loyalty to the Master and sets about helping the survivors rebuild their homes. Soon others remember the treasure, which cheers them despite their homeless state. They are wet and cold and hungry, and many die later from illnesses they contract that night.

The wood-elves of Mirkwood hear about the fall of the dragon from the birds. The Elvenking immediately sends a small army to the Lonely Mountain to recover the treasure, but on the way the company meets a group of messengers Bard has sent from the town, asking for help. The wood-elves turn toward the lake. When huts are built and the people are organized, the strongest men set out with many of the elves to investigate the state of the treasure.