PAX3-FKHR is a fusion oncoprotein generated by the 2;13 chromosomal translocation in alveolar rhabdomyosarcoma (ARMS), a cancer associated with the skeletal muscle lineage. Previous studies determined that high-level PAX3-FKHR expression is a consistent feature in ARMS tumors. To investigate the relationship between expression and phenotype in human myogenic cells, PAX3-FKHR was introduced into immortalized human myoblasts to produce a low overall PAX3-FKHR expression level. Although PAX3-FKHR alone failed to exert transforming activity, a combination of PAX3-FKHR and MYCN induced transforming activity in cell culture assays. Furthermore, myoblasts expressing PAX3-FKHR with or without MYCN formed tumors in SCID mice. These tumors demonstrated invasive features and expressed myogenic markers, consistent with rhabdomyosarcoma. Comparisons of tumor and parental cells revealed that only a subset of parental cells developed into tumors and that tumor cells expressed high PAX3-FKHR levels compared with transduced parental cells. Subcloning of parental PAX3-FKHR/MYCN-transduced myoblasts identified rare high PAX3-FKHR-expressing subclones with high transforming and tumorigenic activity; however, most subclones expressed low PAX3-FKHR and showed neither transforming nor tumorigenic activity. Finally, RNA interference experiments in myoblast-derived tumor and ARMS cells revealed that high PAX3-FKHR expression plays a crucial role in regulating proliferation, transformation, and differentiation. These findings support the premise that high PAX3-FKHR-expressing cells are selected during tumorigenesis.