The "Butcher of Lhasa" is also known as Yinko, played by Alec Baldwin, is a ruthless opium drug dealer who made a practice of taking other's opium fields and killing anyone who crosses his path. One night, Yinko is kidnapped from his estate and taken to a Chinese temple. Once there, he meets a priest who know Yinko's true name, Lamont Crankston. This priest teaches Lamont to overcome the evil in his own heart and to combat crime and to cloud men's minds, thus becoming "The Shadow".

New York City, early 1900s. Lamont Crankston aka "The Shadow" just rescued a professor at NYU from a group of thugs who were about to throw him over the New York City bridge. The Shadow and Professor Tam are both riding a cab and The Shadow recruits Professor Tam as one of his fellow "contacts". Professor Tam is let out of the cab at his home. The cab driver, played by Peter Boyle, is actually another of Lamont/The Shadow's fellow contact and loyal friend. The Shadow tells the cab driver to take him to the Cobalt Club as he transforms back into Lamont Crankston.

Once at the Cobalt Club, Lamont meets his uncle, played by Jonathan Winter, who is also the head of police. As they talk, Margo Lane, played by Penelope Ann Miller, enters the club. Lamont is easily attracted to her and invite her to dinner at a Chinese restaurant. She accepts. As they both enjoy their dinner, Lamont notices that Margo has the gift of reading people's thoughts, for the simple reason that she read his. Lamont takes Margo home.

At a museum, Shiwan Khan, the last descendant of Genghis Khan, is hidden in his ancestor's crypt. He escapes the museum and recruits Mongolon warriors as his followers. He visits Lamont and Shiwan tells him that he also was lectured by the Chinese priest. Shiwan asks Lamont to join him in his worldwide takeover as Yinko, his former self. Lamont refuses.

Shiwan hypnotizes Margo Lane's father, who is a leading scientist, played by Ian McKellen, to build and atomic bomb. Tim Curry, who played father Lane's assistant, also helped in the task of his own free will. Knowing that Lamont is the shadow, Shiwan hypnotizes Margo into killing him. Margo arrives at Lamont's home and with a failed murder attempt, Lamont breaks the spell over Margo. She realizes that Lamont is The Shadow as well, but she promises to keep his secret between the two of them. Margo asks for Lamont's help because her father has disappeared. Together they find the whereabouts of Margo's father and Shiwan Khan at a Hotel Monolith. This hotel was hidden in plain site because Shiwan cast a spell over the whole city NOT to see it. The Shadow strikes at the Hotel Monolith, defeating Shiwan's warriors until only Shiwan remained. Meanwhile, Margo and her father are trying to stop the time sequence on the atomic bomb; they succeed. The Shadow and Shiwan have a battle of the mind in a room full of mirrors. The Shadow had a piece of the mirror strike Shiwan's brain, therefore defeating him. Shiwan ends up in an insane asylum, where one of the doctors is a friend of The Shadow. The doctor tells Shiwan that a part of his brain had to be removed, the part that is used for telepathy. Shiwan is left in a room at the asylum outraged. Lamont and Margo kiss each other and then parted ways.