Studies presented here, using a murine model of bone morphogenetic protein type 2 (BMP2)-induced heterotopic ossification (HO) show that the protein initiates HO by signaling through progenitors in the endoneurium of peripheral nerves. In the mouse, these cells were identified in the endoneurium one day after BMP2 induction using antibody against phosphoSMAD (PS) 1, 5, and 8. Studies conducted in a tracking mouse that contains a tamoxifen-regulated Wnt1-Cre recombinase crossed with a td Tomato red (TR) reporter (Wnt1^CreErt:Ai9Tm) confirmed their neural origin. In this model both BMP2 induction and tamoxifen are absolutely required to induce TR. SP7⁺(osterix⁺)TR⁺ cells were found in the endoneurium on day 1 and associated with bone on day 7. Quantification of TR⁺ and TR⁻ cells isolated by fluorescence-activated cell sorting showed that all SP7⁺ cells were found in the TR⁺ population, whereas only about 80% of the TR⁺ cells expressed SP7. Pre-chondrocytes (Sox 9⁺) and transient brown fat (tBAT, UCP1⁺) also coexpressed TR, suggesting that the progenitor in nerves is multi-potential. The endoneurium of human nerves near the site of HO contained many PS⁺ cells, and SP7⁺ cells were found in nerves and on bone in tissue from patients with HO. Control tissues and nerves did not contain these PS⁺ and SP7⁺ cells. Some osteoblasts on bone from patients with HO were positive for PS, suggesting the continued presence of BMP during bone formation. The data suggests that the progenitors for HO are derived from the endoneurium in both the mouse model of HO and in humans with HO.