We investigated an outbreak of erythromycin-resistant Staphylococcus aureus conjunctivitis in a hospital newborn nursery that used erythromycin eye ointment to prevent ophthalmia neonatorum. Cases occurred in 2 clusters; 20 (14%) of 146 infants in the nursery developed conjunctivitis from July through October, 1987; and 5 (7%) of 69 infants in the nursery developed conjunctivitis during April and May, 1988. A case-control study of the first cluster demonstrated that culture-confirmed cases were more likely than controls to have received prophylactic erythromycin eye ointment or their initial bath from one nurse (odds ratio, 9.0; P = 0.01) or to have been delivered by one physician (odds ratio, 12.7; P = 0.03). The nurse was the only staff person to have a nasopharyngeal culture which yielded erythromycin-resistant S. aureus. Control measures, instituted in October, 1987, included using silver nitrate drops instead of erythromycin eye ointment for prophylaxis; however, in January, 1988, the hospital resumed use of erythromycin eye ointment. No additional cases were identified until mid-April, 1988, when the second cluster of cases occurred. At that time the hospital reinstituted the use of silver nitrate and no additional cases were identified. This investigation illustrates the potential for conjunctival infection with an antimicrobial-resistant pathogen when antimicrobials are used to prevent ophthalmia neonatorum.