Robert learns that Sondra is a young schoolteacher, and she also has a tremendous love for pigeons (with wind flutes attached to their tails) that make sounds as they fly overhead.

She suggested that he be brought to Shangri-La, because she had read his books and idealistic writings about "better worlds," and learned about world-weary Conway's aimless wanderings and dissatisfaction about life:

I saw a man whose life was empty...Oh I know, it was full of this and full of that. But you were accomplishing nothing. You were going nowhere, and you knew it. As a matter of fact, all I saw was a little boy whistling in the dark.

She is unimpressed by his worldly importance, and she forces him to admit his directionless pursuits:

You're absolutely right. And I had to come all the way to a pigeon house in Shangri-La to find the only other person in the world who knew it. May I congratulate you?

Orphaned after her explorer-parents died during a lost expedition in the "wild country beyond the pass," Sondra describes how she was found by Chang and brought up by Father Perrault himself. Conway is still astounded by the promise of life at Shangri-La and his feeling of deja-vu, as they talk in a cherry-blossoming orchard:

Conway: Of course, I can't quite get used to this age thing.
Sondra: I'm thirty.
Conway: Oh, you're gonna make life very simple. It's inconceivable.
Sondra: What?
Conway: All of it. Father Perrault and his magnificent history. This place hidden away from the rest of the world with its glorious concepts. And now you come along and confuse me entirely.
Sondra: Oh, I'm sorry. I thought I was to be the light. But why do I confuse you? Am I so strange?
Conway: Oh, on the contrary, you're not strange. And that, in itself, is confusing. I had the same idea about, about Shangri-La. A sense that I've been here before, that I belonged here.
Sondra: I'm so glad.
Conway: I can't quite explain it, but everything is somehow familiar. The very air I breathe, the Lamasery with its feet rooted in the good earth of this fertile valley while its head explores the eternal. All the beautiful things I see - these cherry blossoms, you. All are somehow familiar. I've been kidnapped and brought here against my will. A crime, a great crime, yet I accept it amiably, with the same warm amiability one tolerates only from a very dear and close friend. Why? Can you tell me why?
Sondra: Perhaps because you've always been a part of Shangri-La without knowing it.
Conway: I wonder.
Sondra: I'm sure of it, just as I'm sure there's a wish for Shangri-La in everyone's heart. I've never seen the outside world, but I understand there are millions and millions of people who are supposed to be mean and greedy. And I just know that secretly, they are all hoping to find a garden spot where there is peace, security, where there's beauty and comfort, where they wouldn't have to be mean and greedy. Oh, I just wish the whole world might come to this valley.
Conway: Then it wouldn't be a garden spot for long.

Almost all of the travelers find peace, romance and contentment in Shangri-La, and they are positively transformed by the experience, although Robert cannot believe everything is real in the idyllic setting:

Robert: I'm waiting for the bump.
Sondra: Bump?
Robert: When the plane lands at Shanghai and wakes us all up. (Sondra pinches his arm) Ouch!
Sondra: You see, it's not a dream.
Robert: You know, I sometimes think that the other is the dream, the outside world.

In the sometimes-sordid "outside world," he explains to Sondra how everyone struggles for existence, to "make a place for himself," to "accumulate a nest egg and so on." She is happy that he has come to Shangri-La - hopefully permanently:

Sondra: I knew you'd come. And I knew when you did, you'd never leave. Am I forgiven for sending for you?
Robert: Forgiven. (He kisses her forehead)

Poetically, while she rests her head in his chest, in the film's most romantic and platonic scene, he describes how a plane's shadow can zoom over hills and mountains below, but that it always faithfully returns to the plane when it lands. He equates Sondra to the plane, and he functions as the plane's shadow:

When we were on that plane, I was fascinated by the way its shadow followed it. That silly shadow, racing along over mountains and valleys, covering ten times the distance of the plane, and yet always there to greet us with outstretched arms when we landed. And I've been thinking that somehow, you're that plane, and I'm that silly shadow. That all my life, I've been rushing up and down hills, leaping rivers, crashing over obstacles, never dreaming that one day that beautiful thing in flight would land on this earth and into my arms.

Lovett proposes to organize and teach classes in geology to the children in the valley. Barnard excitedly draws up blueprints for a plumbing and water-works system (with pipes and a reservoir) for the valley. And Gloria's consumption and her outlook on life miraculously improve. The greatest malcontent in the group is Robert's restless and impatient brother George, who has pursued a 20 year old Russian girlfriend Maria (Margo).

In another meeting with the High Priest, Robert Conway is designated as the Priest's successor, because the Priest is on the verge of dying (and more than 200 years old):

I am placing in your hands the future and destiny of Shangri-La, for I am going to die. I knew my work was done when I first set eyes upon you. I've waited for you, my son, for a long time. I've sat in this room and seen the faces of newcomers. I've looked into their eyes and heard their voices, always in hope that I might find you. My friend, it is not an arduous task that I bequeath, for our order knows only silken bonds. To be gentle and patient, to care for the riches of the mind, to preside in wisdom while the storm rages without...You, my son, will live through the storm. You will preserve the fragrance of our history and add to it a touch of your own mind. Beyond that, my vision weakens but I see at a great distance a new world stirring in the ruins, stirring clumsily but in hopefulness, seeking its lost and legendary treasures, and they will all be here, my son, hidden behind the mountains in the Valley of the Blue Moon, preserved as by a miracle.

The wind blows at the window's curtains, and the lights dim, as the Priest's head drops and he expires ("He died as peacefully as the passing of a cloud's shadow").

Bells peal to announce the death of the High Priest.

Meanwhile, George has arranged - with Maria - for porters (outside the valley) to take him and Maria "back to civilization." Robert is uncertain and indecisive when asked to accompany his brother, and explains what holds him back:

Something grand and beautiful, George. Something I've been searching for all my life. The answer to the confusion and bewilderment of a lifetime. I've found it, George, and I can't leave it. You mustn't either.

George believes that Robert's story about the Lama is completely mad ("What else can I think after a tale like that?...I think you've been hypnotized by a lot of loose-brained fanatics"). Maria is as dissatisfied as he is, and thinks that the Lama (and Chang) are fraudulent, insane imposters. Robert warns his brother that if Maria leaves, she will age considerably (acquiring all the years since her arrival in 1888 when she was brought to the valley at the age of 20):

She's a fragile thing that can only live where fragile things are loved. Take her out of this valley and she'll fade away like an echo.

But Maria insists she will remain young in the outside world, and she shakes his spiritual belief in the magical place:

I'll die if I have to stay here another minute...Look at me, Mr. Conway, do I look like an old woman? Is this the skin of an old woman? Look into my eyes. Are these the eyes of an old woman?

After a long hesitation, doubt and uncertainty breed in Robert's mind. He is slowly convinced to forsake the dream of Shangri-La, turn his back on salvation, and disbelieve the place's unearthly wonders. He is persuaded to leave Shangri-La and accompany his brother and Maria. During their exit, they pass the torch-lit funeral proceedings for the ancient High Lama - a winding line of mourners filing up the valley walls to the temple. George babbles excitedly about their return to England: "We'll have them breathless when we tell them our story," but Robert isn't listening - he's lost in his own thoughts. When Chang and Sondra spot Robert's departure, he assures her: "But he will return." At the gateway to the world, Robert looks back, in a closeup image, for one last tearful and anguished view of the paradise refuge - it is one of the film's most memorable and powerful moments. Sondra frantically races after him and calls out: "Bob!" but cannot reach him. She collapses at the cold entrance to the warm valley.

In a memorable sequence, an avalanche - caused by random and playful gunfire of the Tibetan porters, buries the entire expedition except for the three white travelers. In the fierce blizzard weather as they plod along, a tired Maria is slung over Robert Conway's back, and her face ages rapidly as she quickly reverts in appearance to her actual age. George screams out: "Look at her face! Her face! Look at her face!" Maria dies an old wrinkled and withered woman (aging by half a century, the time she spent in the valley). Despairing and hysterically crazed after an abrupt return to the world of time and death, George commits suicide by throwing himself off a cliff ledge. Robert is left alone to realize that the legendary Shangri-La was not a dream, and he frantically searches for a way to return through the snowy mountains - a tiny figure questing against the immensity of the Himalayas.

In the final sequence of the film, the scene shifts to London where foreign news reports are received. Headlines in London papers read: CONWAY FOUND ALIVE IN CHINESE MISSION, CONWAY SUFFERS LOSS OF MEMORY, UNABLE TO RECOUNT EXPERIENCES OF AN ENTIRE YEAR, HOMEWARD BOUND WITH GAINSFORD ABOARD SS MANCHURIA. [The montage of newspaper headlines was later perfected in Citizen Kane (1941).] Robert has been found alive in a Chinese village a year after his disappearance - as an amnesiac, and is being brought home to England by explorer Lord Gainsford aboard the SS Manchuria.

Gainsford sends a message from the ship to London officials, describing how the determined Conway regained his memory, kept recalling a place called Shangri-La - and then escaped:

Last night, Conway recovered his memory. Kept talking about Shangri-La. Telling a fantastic story about a place in Tibet. Insisted upon returning there at once. Locked him in room, but he escaped us. Jumped ship during night at Singapore. Am leaving ship myself to overtake him, as fearful of his condition. Wrote down details of Conway's story about Shangri-La, which I am forwarding.

According to more London headlines, Gainsford "abandons pursuit of Conway" and returns home to London after a "fruitless search in Orient for Robert Conway." At the Embassy Club in foggy London, Gainsford (Hugh Buckler) describes his almost year-long pursuit and search for the vanished Conway, who sought to return to the Valley of the Blue Moon:

During those last ten months, that man has done the most astounding things. Well, he learned how to fly, stole an Army plane and got caught, put into jail and escaped, all in an amazingly short space of time, but this is only the beginning of his adventure. He begged, cajoled, fought, always pushing forward to the Tibetan frontier. Everywhere I went, I heard the most amazing stories of the man's adventures. Positively astounding, till eventually, I trailed him to the most extreme outposts in Tibet. Of course, he had already gone, but his memory, oh, oh... His memory will live with those natives for the rest of their lives. 'The man who was not human,' they called him. They'll never forget the devil-eyed stranger who six times tried to go over a mountain pass that no other human being dared to travel, and six times was forced back by the severest storms. They'll never forget the madman who stole their food and clothing, who they locked up in their barracks but who fought six of their guards to escape. Why, their soldiers are still talking about their pursuit to overtake him and shuddering at the memory. He led them the wildest chase through their own country. And finally, he disappeared over that very mountain pass that they themselves dared not travel. And that, gentlemen, was the last that any known human being saw of Robert Conway.

Asked if he believes of Conway's talk about Shangri-La, Lord Gainsford gives a toast and salutes the missing Robert Conway:

Yes. Yes, I believe it. I believe it because I want to believe it. Gentlemen, I give you a toast. Here's my hope that Robert Conway will find his Shangri-La. Here's my hope that we all find our Shangri-La.

In the film's final image, [a deviation from Hilton's novel], a bearded and fatigued Conway struggles through the snow to regain and recapture his lost dream. He views the sanctuary of the lost valley through an elusive mountain entrance, and the bells peal again.