The group quickly discovers that Goblin soldiers have encircled the Warmbelly Tavern and shot Jilly. A round of arrows flies into the door jamb and wall outside and they hear a hissing voice demand, "Surrender thieves, you're under arrest, in the name of the Emperor!"
The party refuses and barricades the door. Rowan attempts to help Jilly while Randall finds that Cappadous Took has a secret exit in the store room that leads into a small tunnel. The party shouts back and forth with the goblins for a short time, until the door explodes inward, ending the covnversation. In the blast, Jilly is wounded even worse and as the party evacuates they leave her for dead. Ike and Sam kill several goblins on the back porch and eventually the whole party escapes, with Randall covering their retreat by setting the Warmbelly Tavern on fire (burning Cappadous' entire collection of rare herbs, wines, and other fine goods in the process).
The tunnel exits at the base of a waterfall under the town in an area mostly used as a wedding venue. Upon exiting the party encounters Jagoe Barton, an inexperienced and mildly douchy Ranger and Jilly's older brother. He is running from the fight with the goblins happening up above, his escape aided by a fog that has overtaken the town. He insists that he is going to escape though a tunnel he found behind the waterfall if he can figure out how to bypass the Guardians. While most of the party decides to investigate this possible escape, Ike and Randall decide to head up to the town. At the top of the cliffside trail that leads back into the trail, they find Cappadous in shackles, captured by the Goblins. Randall and Ike decide to attack the six Goblins, one of whom seems to be in charge and who keeps demanding they surrender. They don't, but the Goblins they see are party of a larger force, and Ike takes a lot of arrows in the process of defeating the Goblin Lt. Modbag, something he is only able to accomplish with the help of a mysterious spellcaster in the fog who is picking off Goblins with purple beams of energy. While this fight is going on Randall and Ike see the Dragonborn in gleaming armor riding a Griffon and leading an assault on Crimenius' tower. As they defeat the small group of goblins they see more coming out of the mist, along with larger shapes: Orcs. They quickly retreat back down the path. Cappadous, who managed to free himself from the shackles during the fighting, runs off to an unknown fate. Randall and Ike overhear what they assume is an Orc giving orders to not persue and just wait out the party for now. After exchanging a few choice words, Ike and Randall slip under the waterfall, where they find the rest of the party engaged in a fight with two suits of animated armor, a fight picked by Thea when she cast entangle on them.
The party defeats the animated Guardians, but Rowan is knocked unconscious in the fight. Wounded and on the run, the party heads into the tunnels guarded by the Guardians, tunnels marked in theives cant as "Sparrows/Safe." Inside, they find that the tunnels are part of an old mine system, and that the waterfall entrance is part of a service depot of some sort. They decide to press through the mines and hope to find another exit.