This paper addresses the formation of a cloud system associated with an arctic polynya in Beaufort Sea during springtime. Data were obtained as a part of the First International Satellite Cloud Climatology Project (ISCCP) Regional Experiment (FIRE) Arctic Clouds Experiment from the Canadian Convair 580 aircraft during 25 April 1998. These data include in situ observations of cloud microphysics and meteorological variables and remote measurements from satellite and airborne lidar. A three-dimensional cloud-resolving model with explicit bin-resolving cloud microphysics is used to simulate the atmospheric boundary layer and cloud evolution associated with the polynya. After initialization with the aircraft sounding profiles, a quasi-steady polynya-induced atmospheric boundary layer (ABL) and a cloud system form. Strong turbulence in the ABL occurs above the polynya, the internal thermal boundary layer (ITBL) develops and grows upward in the downwind direction, and the ABL downwind of the polynya is separated into two decoupled layers. The cloud forms in the middle of the polynya, and its upper boundary lifts downwind while the lower boundary lowers and reaches the surface beyond the polynya southern boundary as a light fog. Farther to the south, the fog evaporates and transforms into an elevated cloud plume that extends for several tens of kilometers downwind. This cloud morphology is in good agreement with the lidar observations, which showed a cloud layer extending for more than 100 km downwind, and with the numerous previous observations. The simulated microphysical properties of a mixed cloud are similar to those observed. A new ice nucleation scheme resulted in cloud plume gradual crystallization along the wind and eventual transformation into diamond dust. Detailed evaluation of the water budget, supersaturation, and crystal size spectra showed that the ice crystal supersaturation relaxation times are 10--60 min; thus deposition on the crystals is rather slow, and only 1--5% of the available vapor is deposited on the crystals. The large ice crystal supersaturation relaxation time explains the relatively slow growth and gravitational fallout of the ice crystals, as well as the extensive propagation downwind of the plume.