It did not drop from the chest…yes I am in the Spider Cavern not Arachnid Lair. I reloaded and ran Spider Cavern again and it dropped from the chest the second time. It wasnt lying on the ground, It was not in my bags and the quests did not update the first run. It may have dropped but been invisible as the other loot was flickering. Bug: Khalims Eye does not always drop from the chest when it should or it cant be seen for some technical problem.