Ewing's sarcoma is a member of Ewing's family tumors (EFTs) and the second most common solid bone and soft tissue malignancy of children and young adults. It is associated in 85% of cases with the t(11;22)(q24:q12) chromosomal translocation that generates fusion of the 5' segment of the EWS gene with the 3' segment of the ETS family gene FLI-1. The EWS-FLI-1 fusion protein behaves as an aberrant transcriptional activator and is believed to contribute to EFT development. However, EWS-FLI-1 induces growth arrest and apoptosis in normal fibroblasts, and primary cells that are permissive for its putative oncogenic properties have not been discovered, hampering basic understanding of EFT biology. Here, we show that EWS-FLI-1 alone can transform primary bone marrow-derived mesenchymal progenitor cells and generate tumors that display hallmarks of Ewing's sarcoma, including a small round cell phenotype, expression of EFT-associated markers, insulin like growth factor-I dependence, and induction or repression of numerous EWS-FLI-1 target genes. These observations provide the first identification of candidate primary cells from which EFTs originate and suggest that EWS-FLI-1 expression may constitute the initiating event in EFT pathogenesis.