The adventurers enter the city's sewer, but the entrance gets blocked by a collapse caused by Xanathar, the eponymous beholder.

The team descends further beneath the city, going through Dwarf and Drow clans, to Xanathar's lair, where the final confrontation takes place.

The possibility to increase the size of the player's party through the recruiting of NPCs was a tradition in all of the Eye of the Beholder series.

[10] Eye of the Beholder was reviewed in 1991 in Dragon #171 by Hartley, Patricia, and Kirk Lesser in "The Role of Computers" column, who gave it 5 out of 5 stars.

[20] Dennis Owens of Computer Gaming World called it "a stunning, brilliantly graphic and agonizingly tricky" 3-D CRPG.

Although also praising the graphics and audio, stating that they "really give you the feeling of being in an actual dungeon", she criticized the awkward spell user interface and the "outrageous" abrupt ending.

Other areas that needed work included the combat, plot, and NPC interaction; nonetheless, she was hopeful that with such improvements "the Legend series will become one of the leaders in the CRPG field".

The One praises Eye of the Beholder's gameplay, stating that "in contrast to previous AD&D titles, there's more emphasis on puzzle-solving than combat – a refreshing change ...

[15] They gave the Sega CD version a 7.2 out of 10, this time praising the ability to create custom characters but criticizing the audio.

[14] While reviewing the Sega CD version, Computer and Video Games said it is "not quite up there with Snatcher, but without doubt a highly ace role-player".

[30] In January 1991, SSI participated in Computer Gaming World's Top Ad contest and their cover art for Eye of the Beholder came in first place among voting readers, despite the magazine publisher's objection to the piece.