Functional recovery does not occur in 10% of patients with neonatal brachial plexus palsy. In these patients, resection of a neuroma-in-continuity (NIC) and surgical nerve reconstruction are required. The formation of a NIC seems to prohibit functional recovery, but the underlying biologic mechanisms for this failure are poorly understood. We systematically analyzed a large series of NIC tissue samples from 17 neonatal and 3 adult patients using an array of immunohistochemical techniques. In a large proportion of patients (74%), the NIC contained multiple focal globular areas with markedly diminished myelination. These focal myelin deficits (FMDs) contain Schwann cells that enwrap axons in an apparently normal configuration but do not form myelin. Biomathematical analysis of a 2-cm neuroma predicted a higher-than-95% probability that an axon would encounter 10 FMDs. Axon segments in FMDs also had disturbed nodes of Ranvier (i.e., FMDs contained significantly fewer clustered Na(v)1.6 channels and decreased Caspr and ankyrin G). These observations indicate that axons in NIC course through multiple FMDs and that this may be the pathobiologic basis for conduction blocks in patients with neonatal brachial plexus palsy. These observations indicate the need for novel strategies to promote functional recovery after neonatal brachial plexus palsy by improving myelination in the NIC.