Adapted from James Hilton's novel, a British diplomat is taken to a mystical Tibetan valley of peaceful happiness, but his brother tries to leave.
During a Chinese revolution in 1935 British diplomat Robert Conway (Ronald Coleman) evacuates people on airplanes, burning a hangar for light. In the last plane with Robert is his brother George Conway (John Howard), the paleontologist Alexander Lovett (Edward Everett Horton), the white-collar criminal Henry Barnard (Thomas Mitchell), and the slowly dying Gloria Stone (Isabel Jewell). Robert drinks with his brother and talks of disbanding armies. An Oriental pilot is flying west and lands in Tibet for gas. At 21,000 feet Gloria becomes hysterical and is given oxygen. The plane crashes in the snowy Himalayas, killing the pilot. George despairs; but hikers led by Chang (H. B. Warner) find them and lead them on a mountain path to Shangrila, a palace overlooking a warm valley.
Gloria asks Chang for a doctor, but there are none. They enjoy a meal, and Chang informs them they are isolated. Robert feels peaceful there, and George meets Russian Maria (Margo). Chang tells Robert that they practice moderation and courtesy. Chang tells how the Belgian priest Father Pero started it in 1713 after amputating his leg. Bernard shows Gloria the gold he found. Robert goes riding after Sondra (Jane Wyatt) and finds her swimming nude. At dinner Gloria looks better, and Bernard says the police were after him. In frustration George shoots at Tibetans, and Robert knocks him down. Robert asks Chang why they are prisoners, and he says that the High Lama wants to see him. The High Lama (Sam Jaffe) has only one leg, and Robert realizes he is Father Pero. The High Lama says he admires Robert and had a vision of destruction by war; he hopes they will have a new life based on being kind.
Robert finds Sondra teaching children, whom he dismisses. She shows him her pigeons with flutes. She read his books and says his life was empty; but Shangrila is part of him. Lovett and Bernard frolic with girls and wine. Maria asks George to come to her. Sondra asks Robert why the world is sordid, and he kisses her. Lovett tells Chang that he will teach the children geology, and Bernard tells Robert his plans to give the village plumbing. Chang tells Robert that Maria would revert to her old age if she left Shangrila. George calls Chang a liar and threatens to leave. Robert goes to the High Lama, who puts Shangrila in his hands and dies. George plans to leave, but Bernard, Gloria, and Lovett are staying. Robert tells George not to leave and why they should stay; but George tells his brother he is insane. Robert warns George how old Maria is; but Maria bribed the porters, pleads to go, and insists she is young. Robert decides to go, and Sondra runs after him. As they hike Maria asks to rest. Porters shoot at them and cause an avalanche. George sees that Maria is old and jumps off a cliff; but Robert makes it to a village. News reports that Robert Conway lost his memory. In London Lord Gainsford tells how Conway escaped to go back, and he toasts Shangrila. In the final scene the bearded Robert sees it.
Unfortunately some of this great film was lost, though all of the sound-track has been restored. This story of Tibetan mysticism appeals to western audiences by making the Lama a Belgian priest, and in the novel Robert falls in love with a Tibetan woman. Yet this drama prophetically warns against human destruction from greed and war while appealing to simple kindness and moderation.