With the prison ship in flames, the party escapes and floats safely ashore, only to discover a battle raging between the wreck survivors and a group of kobolds. A fight ensues, with the party cutting down all the kobolds.
They find their way to Peonyville in the early hours of the morning, still dressed in the rags of their captivity. After bullying an innkeeper into letting them stay, despite being penniless, the party finally gets their first good rest in months. The next day, Tragos makes some money performing, and then gets lucky at the gambling table. Everyone gets new pants, and it is a good day.
That night, Tragos tells the party he heard about a dragon that regularly demands tribute from the town. The innkeeper indicates that the town is mostly ok with this arrangement, since the dragon keeps the other threats at bay (including the kobolds, who work for the dragon).
Realizing that the dragon may be angry that they killed all the kobolds on the beach, the party leaves town immediately. They are stopped on the road by a party of kobolds, who tell them that the dragon wants to talk to them. Not wanting to anger a dragon further, they agree and are brought to see the dragon.
The dragon tells them that she suspects the kobolds of planning something, and hires the party to find out what’s going on. After an interrogation that leaves Bjorn covered in kobold blood, and a near fatal encounter with a pit of maggots and kobolds, they discover the plot: a ritual the kobolds have been preparing that requires the corpse of a dragon.