Before returning to England to become the new Foreign Secretary, writer, soldier and diplomat Robert Conway (Ronald Colman) has one last task in 1935 China: to rescue 90 Westerners in the city of Baskul. He flies out with the last few evacuees, just ahead of armed revolutionaries.
Unbeknownst to the passengers, the pilot has been replaced and their aircraft hijacked. It eventually runs out of fuel and crashes deep in the Himalayan Mountains, killing their abductor. The group is rescued by Chang (H.B. Warner) and his men and taken to Shangri-La, an idyllic valley sheltered from the bitter cold. The contented inhabitants are led by the mysterious High Lama (Sam Jaffe)
Initially anxious to return to civilization, most of the newcomers grow to love Shangri-La, including paleontologist Alexander Lovett (Edward Everett Horton), swindler Henry Barnard (Thomas Mitchell) and bitter, terminally ill Gloria Stone (Isabel Jewell), who miraculously seems to be recovering. Conway is particularly enchanted, especially when he meets Sondra (Jane Wyatt), who has grown up in Shangri-La. However, Conway's younger brother George (John Howard), and Maria (Margo), another beautiful young woman they find there, are determined to leave.
Conway eventually has an audience with the High Lama and learns that his arrival was no accident. The founder of Shangri-La is said to be hundreds of years old, preserved, like the other residents, by the magical properties of the paradise he has created, but is finally dying and needs someone wise and knowledgeable in the ways of the modern world to keep it safe. Having read Conway's writings, Sondra believed he was the one; the Lama had agreed with her and arranged for Conway's abduction. The old man names Conway as his successor and then peacefully passes away....