Reed et al described the clinical and light-microscopic findings of palisaded encapsulated neuromas in 1972, but few cases have been reported since. We have studied 81 consecutive tumors. Clinically, these were solitary, asymptomatic, 2- to 6-mm, flesh-colored papules, usually located on the face of middle-aged patients. The correct diagnosis was rarely made; the lesion was most often mistaken for a basal cell epithelioma, melanocytic nevus, or other benign tumor. Light microscopy revealed single or multiple encapsulated dermal lobules composed of interlacing Schwann cells. Variable numbers of fine axons and myelin sheath remnants were present. Palisading of nuclei was not a prominent feature. Electron microscopy demonstrated substantial numbers of class C fibers (mostly nonmyelinated) only partially enveloped by Schwann cell cytoplasm. Pathologically, palisaded encapsulated neuromas are distinctive true neuromas resembling those seen in the multiple mucosal neuroma syndrome. Electron-microscopic findings are similar to those seen in peripheral nerve regeneration, suggesting that palisaded encapsulated neuromas may be traumatic in origin, and could represent regeneration following local minor injury to the skin.