Skeletal muscle formation in Drosophila melanogaster requires two types of myoblasts, muscle founders and fusion-competent myoblasts. Lame duck (Lmd), a member of the Gli superfamily of transcription factors, is essential for the specification and differentiation of fusion-competent myoblasts. We report herein that appropriate levels of active Lmd protein are attained by a combination of posttranscriptional mechanisms. We provide evidence that two different regions of the Lmd protein are critical for modulating the balance between its nuclear translocation and its retention within the cytoplasm. Activation of the Lmd protein is also tempered by posttranslational modifications of the protein that do not detectably change its subcellular localization. We further show that overexpression of Lmd protein derivatives that are constitutively nuclear or hyperactive results in severe muscle defects. These findings underscore the importance of regulated Lmd protein activity in maintaining proper activation of downstream target genes, such as Mef2, within fusion-competent myoblasts.