Hedgehog (Hh) pathway activation in R26-SmoM2;CAGGS-CreER mice, which carry a tamoxifen-inducible activated Smoothened allele (SmoM2), results in numerous microscopic tumor foci in mouse skeletal muscle. These tumors exhibit a highly differentiated myogenic phenotype and resemble human fetal rhabdomyomas. This study sought to apply previously established strategies to isolate lineally distinct populations of normal mouse myofiber-associated cells in order to examine cellular heterogeneity in SmoM2 tumors. We demonstrate that established SmoM2 tumors are composed of cells expressing myogenic, adipocytic and hematopoietic lineage markers and differentiation capacity. SmoM2 tumors thus recapitulate the phenotypic and functional hetereogeneity observed in normal mouse skeletal muscle. SmoM2 tumors also contain an expanded population of PAX7+ and MyoD+ satellite-like cells with extremely low clonogenic activity. Selective activation of Hh signaling in freshly isolated muscle satellite cells enhanced terminal myogenic differentiation without stimulating proliferation. Our findings support the conclusion that SmoM2 tumors represent an aberrant skeletal muscle state and demonstrate that, similar to normal muscle, myogenic tumors contain functionally distinct cell subsets, including cells lacking myogenic differentiation potential.