It's a real photo -- here's what Snopes has to say about it
Origins: Many viewers were tempted to write off the above-displayed photograph, distributed by the Associated Press (AP) on 9 January 2006, as a fabrication because it seemed so far outside their realm of experience. However, the congenital abnormality exhibited by this kitten, although not common, has been observed and documented before in a variety of species. Additionally, the AP took significant steps to verify that the photographs of Cyclopes provided by Traci Allen were genuine:
AP regional photo editor Tom Stathis said he took extensive steps to confirm the one-eyed cat was not a hoax. Stathis had Allen ship him the memory card that was in her camera. On the card were a number of pictures — including holiday snapshots, and four pictures of a one-eyed kitten. The kitten pictures showed the animal from different perspectives.
Fabricating those images in sequence and in the camera's original picture format, from the varying perspectives, would have been virtually impossible, Stathis said.
Cyclopia (or synophthalmia) is a birth defect in which a normally two-eyed animal is born with only a single fused eye, generally disproportionately large and centered on the face above the area where the nose would usually appear. Typically in cyclopic births the nose is either absent or present as an appendage located above the single eye. (Eyelids are also generally absent in such births, which explains why the eye of the one-day-old kitten pictured above is open even though cats are usually born with their eyes shut and remain in that condition for the first week or two of their lives.)