A ventriculo-peritoneal shunt is a standard surgical management for hydrocephalus, but complications may impede the management of this disease. Obstruction of the catheter is one of the most common complications and manifests clinically in various ways. Intraparenchymal cyst development after shunt malfunction has been reported by several authors, but the underlying mechanism and optimal treatment methods are debatable. The authors report a case of intraparenchymal cyst formation around a proximal catheter in a premature infant after a ventriculo-peritoneal shunt and discuss its pathogenesis and management.