Endochondral bone formation is a highly orchestrated process involving coordination among cell–cell, cell–matrix and growth factor signaling that eventually results in the production of mineralized bone from a cartilage template. Chondrogenic and osteogenic differentiation occur in sequence during this process, and the temporospatial patterning clearly requires the activities of heparin binding growth factors and their receptors. Heparanase (HPSE) plays a role in osteogenesis, but the mechanism by which it does so is incompletely understood. We used a combination of ex vivo and in vitro approaches and a well described HPSE inhibitor, PI-88 to study HPSE in endochondral bone formation. In situ hybridization and immunolocalization with HPSE antibodies revealed that HPSE is expressed in the peri-chondrium, peri-osteum, and at the chondro–osseous junction, all sites of key signaling events and tissue morphogenesis. Transcripts encoding Hpse also were observed in the pre-hypertrophic zone. Addition of PI-88 to metatarsals in organ culture reduced growth and suggested that HPSE activity aids the transition from chondrogenic to osteogenic processes in growth of long bones. To study this, we used high density cultures of ATDC5 pre-chondrogenic cells grown under conditions favoring chondrogenesis or osteogenesis. Under chondrogenic conditions, HPSE/Hpse was expressed at high levels during the mid-culture period, at the onset of terminal chondrogenesis. PI-88 addition reduced chondrogenesis and accelerated osteogenesis, including a dramatic up-regulation of osteocalcin levels. In normal growth medium, addition of PI-88 reduced migration of ATDC-5 cells, suggesting that HPSE facilitates cartilage replacement by bone at the chondro–osseous junction by removing the HS component of proteoglycans, such as perlecan/HSPG2, that otherwise prevent osteogenic cells from remodeling hypertrophic cartilage.