HIV transmission via breastfeeding accounts for a considerable proportion of infant HIV acquisition. However, the origin and evolution of the virus population in breast milk, the likely reservoir of transmitted virus variants, are not well characterized. In this study, HIV envelope (env) genes were sequenced from virus variants amplified by single-genome amplification from plasmas and milk of 12 chronically HIV-infected, lactating Malawian women. Maximum likelihood trees and statistical tests of compartmentalization revealed interspersion of plasma and milk HIV env sequences in the majority of subjects, indicating limited or no compartmentalization of milk virus variants. However, phylogenetic tree analysis further revealed monotypic virus variants that were significantly more frequent in milk (median proportion of identical viruses, 29.5%; range, 0 to 61%) than in plasma (median proportion of identical viruses, 0%; range, 0 to 26%) (P = 0.002), suggesting local virus replication in the breast milk compartment. Moreover, clonally amplified virus env genes in milk produced functional virus Envs that were all CCR5 tropic. Milk and plasma virus Envs had similar predicted phenotypes and neutralization sensitivities to broadly neutralizing antibodies in both transmitting and nontransmitting mothers. Finally, phylogenetic comparison of longitudinal milk and plasma virus env sequences revealed synchronous virus evolution and new clonal amplification of evolved virus env genes in milk. The limited compartmentalization and the clonal amplification of evolving, functional viruses in milk indicate continual seeding of the mammary gland by blood virus variants, followed by transient local replication of these variants in the breast milk compartment.