Objectives The objective was to evaluate the effects of virtual reality versus conventional physiotherapy on upper extremity function in children with obstetric brachial plexus injury. Methods Forty children with Erb's palsy were selected for this randomized controlled study. They were assigned randomly to either group A (conventional physiotherapy program) or group B (virtual reality program using Armeo® spring for 45 min three times/week for 12 successive weeks). Mallet system scores for shoulder function and shoulder abduction, and external rotation range of motion (ROM) were obtained; shoulder abductor, and external rotators isometric strength were evaluated pre-and post-treatment using Mallet scoring system, standard universal goniometer, and handheld dynamometer. Results The results of this study indicate that the children in both groups showed improvement in shoulder functions post-treatment with greater improvements in group B. The abduction muscle strength after treatment was 8.53 and 11.3 Nm for group A and group B, respectively. The external rotation muscle strength after treatment was 5.88 and 7.45 Nm for group A and group B, respectively. Conclusions The virtual reality program is a significantly more effective than conventional physiotherapy program in improving the upper extremity functions in children with obstetric brachial plexus injury.