Shadow over Mystara is a side-scrolling beat-'em-up with role-play elements that make it stand out from other similar games released at the time. In addition to the original four heroes found in its predecessor, Dungeons & Dragons: Tower of Doom (Cleric, Dwarf, Elf and Fighter), Shadow of Mystara adds a Thief and a Magic-User to the selection. Furthermore, with the inclusion of two separate versions of each character's sprite set, the game allows up to two players to select the same character (in Tower of Doom each of the characters could only be selected once), effectively giving the game 12 "different" characters to choose from. The two Clerics and two Magic Users also have subtle differences within their spell books. The controls are using four buttons: Attack, Jump, Select (brings up a small inventory ring around the character allowing the player to choose what item is set in the Use slot) and Use. The Cleric, Elf and Magic-User also have two extra rings for their spells, with the Jump button used to switch from ring to ring. While the game uses the same kick harness as the previous game, the Select and Use buttons are reversed. Shadow over Mystara also introduced a selection of special moves which are executed by moving the joystick and tapping the buttons in certain combinations, in a way similar to the Street Fighter series. The characters (except for the Magic-User) have a Dashing Attack as well as a Rising Attack which can be used to combo monsters or even juggle them in the air. Most characters (again, with the exception of the Magic-User and also Cleric) also have a Megacrush, a move common to nearly all of Capcom side-scrollers, which damages all enemies standing close enough to the character but in turn also damaging the player themselves.

After defeating the Arch Lich Deimos, the heroes continued on their journey through the Broken Lands of Glantri upon realizing that Deimos was only part of an even greater evil plan, and he was in fact being used by a mysterious sorceress named Synn, who appears to be a young woman, but commands a powerful magical abilities, has been scheming to control the Kingdom of Glantri and conquer the humanoids of the Republic of Darokin. After Deimos was defeated, Synn vowed to punish the land that she desired. At the game's end, the player discovers that Synn is in fact a centuries-old red dragon, determined to harness the mystical forces of the lands she has conquered, in order to awaken a creature of even more devastating physical prowess than herself - known and described only as The Fiend. The heroes then fight against Synn in her lair. When she is slain, her monster is also destroyed by an airship bombing.