Then, a stroke of luck. Jason receives word that the local orchestra conductor, a man called Xuan Ke, may have some information for us. Xuan knew Rock when he was a child and, on top of that, in the 1990s he claimed to have pinpointed Shangri-La. This is a man we have to see.

We track him down at his compound-like residence on Lijiang's outskirts and, with lit cigarette dancing as he gesticulates, Xuan holds court. Not only did he know Dr. Rock, he tells us, but it was the doctor who taught him English. He launches into a series of anecdotes that are kindly meant, but paint Rock as an arrogant, cantankerous old misogynist known for his tendency to fly into rages and lash out with his stick. Also, it emerges that he wasn't really a doctor, but simply insisted others address him as such.

Eventually Xuan is coaxed onto the topic of Shangri-La. "This I did!" he says. "Discovered it, first man I was!" (His English is generally good, but he does give occasional bursts of mangled syntax worthy of Yoda.) "Before me, the Chinese had not heard of the book, Lost Horizon," he says. "But in 1998 I told a British press group, 'I know this Shangri-La.'" Xuan then escorted the group north of Lijiang to a mountain overlooking his mother's birthplace, a village called Anan. "They took a famous picture of it and convinced the world this was Shangri-La." He bursts out into a dry cackle. "The British will believe anything."

So, is this village the real Shangri-La or not? Xuan thinks for a moment. "When I read the book, I thought of this place, this Anan. It's very calm, very beautiful." He pauses to light his 17th cigarette. "It's not possible to point at a map and say 'This is Shangri-La,' but Anan is close."

It's not the strongest lead, but it's something. Next morning, we hit the road early, bound for Anan. And what a road. The path takes us twisting and turning through the utterly spectacular Tiger Leaping Gorge, with its steep cliffs carved over eons by the fast-flowing Jingsha River thousands of feet below.

In such scenic surroundings, it's easy to get distracted, so by the time we reach the tiny village of Anan, the sun has already tucked itself behind the mountain ridge. But even in the deepening dusk, it quickly becomes apparent that if Xuan Ke's press crew had left their vantage point on the mountain and come down into the heart of the village, they would have been far less confident presenting it to the world as Shangri-La.

Anan is tiny, run-down, and poverty-stricken. Dirty-faced children run between dilapidated wooden shacks, and livestock share open living spaces with huddled families. I barely even need to note the lack of monastery or Karakal mountain look-alike: nothing about this place bears much relation to Hilton's Shangri-La.

We approach a young woman who is squatting outside her house washing dishes in a plastic bowl. She seems alarmed by the arrival of our shiny LR3 in her village, but she does prove to be helpful. "Shangri-La is over there," she says simply, gesturing over her shoulder toward a nearby town. This town, we find, has been officially renamed Shangri-La by the Chinese government, though it used to be called Zhongdian—which, if you remember, is where our story began.

The 1990s heralded a hot contest for the title of Shangri-La throughout the Tibetan regions of China—practically every village with a yak and a prayer wheel declared it was the lost idyll. Zhongdian was a rough old logging town where the police feared to tread, so it was a remarkably unlikely candidate. But, against all odds, it won the day: The name was changed and plans were laid for a Tibetan trinket takeover.

We are settled in a bar named "The Raven" on the main street of the old town. It's Jason's bar, actually—along with Haiwei Trails, he and his partner Amy have run this place since 2003. And even in that short time, he's witnessed dramatic changes. "Zhongdian used to be a quiet place that no one paid much attention to," he says, "but now it's so much busier. Ours was the first bar like this to open in the old town, and now that 30 others have followed our lead, we sit and complain about the march of progress. The irony is crushing." He laughs. "I complain about the change because it's compromised my little oasis in the middle of nowhere, but it's undoubtedly improved people's lives here."

Jason and I wander outside and the sawdust-clogged cacophony of Zhongdian's old town reaches forward to engulf us. Trucks shudder past belching foul black air, and young girls in fluorescent pink headdresses wind between them, emitting high-pitched peals of laughter through their surgical face masks (worn to ward off the cold). Up on the hill, tens of Buddhist faithful heave the giant golden prayer wheel clockwise; nearby, workmen are heaving at an elderly wooden frame, with newly varnished carved lintels stacked in piles at their feet. An old woman sits only feet away, oblivious to the tumult around her.

What does she think of all these changes? She thinks for a moment, and then points toward the worn-looking cobblestones at her feet. "This paving is new," she says. "Two years ago, these streets were only dirt tracks, and there was no running water. So it's good for me." She tells us how houses that were near worthless are now being rented out, and people are leaving the old town, using their newfound cash to fund modern houses in the new town.

We chat to a few more locals and there appears to be no sense of regret at the town losing its identity. "The money these guys are making now does seem to compensate for any sense of loss," Jason says.

The ultimate example of Zhongdian's sparkly new image is the ultra-luxurious five-star Banyan Tree resort, which opened in 2005 in a picturesque valley just out of town. It is, as we've hoped, decadent in the extreme. The rooms—or, more correctly, lodges—are gloriously plush, and the bathroom deserves a mention all its own because not only is it generously appointed, with its four-foot-deep bath and separate powder room, but it is also the size of Bulgaria.

Creating the image of a modern-day Shangri-La is clearly at the heart of this venture. Effort has been made to give guests the full Tibetan treatment: each of the lodges is an original Tibetan farmhouse, uprooted from a local village and reconstructed on site; the staff wear Tibetan robes (which don't quite hang low enough to hide their modern trainers); and the resort runs trips to a local village, where guests can eat a Tibetan meal, listen to Tibetan music, and enjoy the sight of Tibetans being, well, Tibetan. And it's an effective pitch. "The Shangri-La thing was a great romantic hook for coming here," says Galina, an American visitor, when I corner her in reception. "We want the whole Tibetan experience. But, of course, we also want a little comfort."

After two nights, the comfort of the Banyan Tree is proving increasingly seductive; but it's a creation, not a lost paradise. We must get going—just as soon as I can peel the photographer off the massage table—because suddenly we have our hottest lead yet.

When our hunt for Shangri-La began, I was intrigued by reports of two lawyers from the U.S.—Peter Klika and Ted Vaill—who in 2002 claimed that they had found Shangri-La. This frankly wouldn't make them much different from any other exploration party returning chafed and addled from their adventures if it weren't that they had used as a guide the expeditions of our very own cranky, stick-wielding explorer, Dr. Rock.

I've been trying to get in touch with both of these guys since before I left home, but a number of obstacles including, I kid you not, an earthquake, thwarted my efforts. Until this morning. A long-awaited phone call with Peter Klika in Hawaii. And now we have not just details of his Shangri-La, but also helpful directions!