The brain and eyes from a 1-day-old, male mixed-breed lamb with bilateral microphthalmia were examined. Bilateral ventral colobomata of choroid, sclera, retina and optic nerve were accompanied by agenesis of the optic nerve, and dilated lateral and third ventricular cavities that communicated with the subarachnoid space. Abundant neuroretinal tissue extending through the colobomatous defect to retro-orbital connective tissue, the meningeal surface and ventricular system were identified by histologic examination. Positive immunolabeling of these structures for recoverin (a photoreceptor marker) established the retinal origin of ectopic structures. The optic nerve was replaced by a short fibrous stalk containing glial nests. Sections of brainstem revealed extensive architectural disorganization. A developmental abnormality resulting from defective optic nerve and retina compartmentalization, accompanied by abnormalities of midline development consistent with the holoprosencephaly syndrome, was diagnosed. These lesions are consistent with signaling defects in the sonic hedgehog signaling pathway. Genetic and toxic causes of sonic hedgehog signaling defects are discussed.