Background The recent development and spread of ultrasonography and ultrasonography-guided fine needle aspiration biopsy (FNAB) has facilitated the detection of small papillary microcarcinomas of the thyroid measuring 1 cm or less (PMC). The marked difference in prevalence between clinical thyroid carcinoma and PMC detected on mass screening prompted us to observe PMC unless the lesion shows unfavorable features, such as location adjacent to the trachea or on the dorsal surface of the thyroid possibly invading the recurrent laryngeal nerve, clinically apparent nodal metastasis, or high-grade malignancy on FNAB findings. In the present study we report comparison of the outcomes of 340 patients with PMC who underwent observation and the prognosis of 1,055 patients who underwent immediate surgery without observation. Methods Between 1993 and 2004, 340 patients underwent observation and 1,055 underwent surgical treatment without observation. These 1,395 patients were enrolled in the present study. Observation periods ranged from 18 to 187 months (average 74 months). Results The proportions of patients whose PMC showed enlargement by 3 mm or more were 6.4 and 15.9% on 5-year and 10-year follow-up, respectively. Novel nodal metastasis was detected in 1.4% at 5 years and 3.4% at 10 years. There were no factors related to patient background or clinical features linked to either tumor enlargement or the novel appearance of nodal metastasis. After observation 109 of the 340 patients underwent surgical treatment for various reasons, and none of those patients showed carcinoma recurrence. In patients who underwent immediate surgical treatment, clinically apparent lateral node metastasis (N1b) and male gender were recognized as independent prognostic factors of disease-free survival. Conclusions Papillary microcarcinomas that are not associated with unfavorable features can be candidates for observation regardless of patient background and clinical features. If there are subsequent signs of progression, such as tumor enlargement and novel nodal metastasis, it would not be too late to perform surgical treatment. Even though the primary tumor is small, careful surgical treatment including therapeutic modified neck dissection is necessary for N1b PMC patients.