The author has experienced a case of microphthalmos with large orbital cyst in a 4 months old female, that was found at the time of birth. To facilitate fitting a cosmetic prosthesis, the microphthalmos with cyst was removed surgically. On serial section I could find an area of discontinuation of the sclera that was suspected to be the defective closure of the embryonic cleft. Some aberrant retinal tissue was found in the wall of the cyst, and markedly disorganized ocular tissue forming a tumor-like mass filled the microphthalmic eyeball. In view of these histopathologic findings I could draw the conclusion that developmental failure of the embryonic eyeball and consequential proliferation of the embryonic neuroepithelial cells occurred at an early developmental stage causing the formation of microphthalmos with cyst.