Dermoid cysts may occur in the orbit, most commonly in the superolateral area. Malignant transformation of such lesions has been previously reported; however, most turn out to be squamous cell carcinoma. The authors' patient initially presented with mild proptosis and limitation in extraocular movements. Preliminary biopsy showed whitish amorphous material and abundant hairs filling the thin-walled cyst, consistent with dermoid cyst. The patient underwent tumor resection via lateral orbitotomy with bone window and transorbital endoscopic approach for the dural involvement. Final biopsy showed dermoid cyst with pilosebaceous malignant transformation showing p53 expression and 30% of Ki-67 index. Adjuvant radiotherapy was performed. To the best of the authors' knowledge, this is the first reported case of this type. Despite its rarity, there should always be a high index of suspicion and complete work-up for an accurate diagnosis.