TGF-beta has been implicated in the proliferation and differentiation of chondrocytes and osteoblasts. However, the in vivo function of TGF-beta in skeletal development is unclear. In this study, we investigated the role of TGF-beta signaling in growth plate development by creating mice with a conditional knockout of the TGF-beta type I receptor ALK5 (ALK5(CKO)) in skeletal progenitor cells using Dermo1-Cre mice. ALK5(CKO) mice had short and wide long bones, reduced bone collars, and trabecular bones. In ALK5(CKO) growth plates, chondrocytes proliferated and differentiated, but ectopic cartilaginous tissues protruded into the perichondrium. In normal growth plates, ALK5 protein was strongly expressed in perichondrial progenitor cells for osteoblasts, and in a thin chondrocyte layer located adjacent to the perichondrium in the peripheral cartilage. ALK5(CKO) growth plates had an abnormally thin perichondrial cell layer and reduced proliferation and differentiation of osteoblasts. These defects in the perichondrium likely caused the short bones and ectopic cartilaginous protrusions. Using tamoxifen-inducible Cre-ER-mediated ALK5-deficient primary calvarial cell cultures, we found that TGF-beta signaling promoted osteoprogenitor proliferation, early differentiation, and commitment to the osteoblastic lineage through the selective MAPKs and Smad2/3 pathways. These results demonstrate the important roles of TGF-beta signaling in perichondrium formation and differentiation, as well as in growth plate integrity during skeletal development.