Schwannomas are peripheral nerve sheath tumors that often occur in the setting of an inherited tumor predisposition syndrome, including neurofibromatosis types 1 (NF1) and 2 (NF2), familial schwannomatosis and Carney complex. Loss of the NF2 tumor suppressor (encoding NF2, or Merlin) is associated with upregulation of the Rac1 small GTPase, which is thought to have a key role in mediating tumor formation. In prior studies, we generated a mouse model of schwannomas by performing tissue-specific knockout (KO) of the Carney complex gene Prkar1a, which encodes the type 1A regulatory subunit of protein kinase A. These tumors exhibited down-regulation of Nf2 protein and an increase in activated Rac1. To assess the requirement for Rac1 in schwannoma formation, we generated a double KO (DKO) of Prkar1a and Rac1 in Schwann cells and monitored tumor formation. Loss of Rac1 reduced tumor formation by reducing proliferation and enhancing apoptosis. Surprisingly, the reduction of tumor formation was accompanied by re-expression of the Nf2 protein. Furthermore, activated Rac1 was able to downregulate Nf2 in vitro in a Pak-dependent manner. These in vivo data indicate that activation of Rac1 is responsible for suppression of Nf2 protein production; deficiency of Nf2 in Schwann cells leads to loss of cellular growth control and tumor formation. Further, PKA activation through mutation in Prkar1a is sufficient to initiate Rac1 signaling, with subsequent reduction of Nf2 and schwannomagenesis. Although in vitro evidence has shown that loss of Nf2 activates Rac1, our data indicate that signaling between Nf2 and Rac1 occurs in a bidirectional fashion, and these interactions are modulated by PKA.