The tumor predisposition disorder neurofibromatosis type I (NF1) is one of the most common genetic disorders of the nervous system. It is caused by mutations in the Nf1 tumor-suppressor gene, which encodes a GTPase-activating protein (GAP) that negatively regulates p21-RAS. Development of malignant nerve tumors and neurofibromas occurs frequently in NF1. However, little is known about the molecular mechanisms mediating the initiation and progression of these complex tumors, or the identity of the specific cell type that gives rise to dermal or cutaneous neurofibromas. In this study, we identify a population of stem/progenitor cells residing in the dermis termed skin-derived precursors (SKPs) that, through loss of Nf1, form neurofibromas. We propose that SKPs, or their derivatives, are the cell of origin of dermal neurofibroma. We also provide evidence that additional signals from nonneoplastic cells in the tumor microenvironment play essential roles in neurofibromagenesis.