Differentiating cells interact with their extracellular environment over time. Chondrocytes embed themselves in a proteoglycan (PG)-rich matrix, then undergo a developmental transition, termed "maturation," when they express ihh to induce bone in the overlying tissue, the perichondrium. Here, we ask whether PGs regulate interactions between chondrocytes and perichondrium, using zebrafish mutants to reveal that cartilage PGs inhibit chondrocyte maturation, which ultimately dictates the timing of perichondral bone development. In a mutagenesis screen, we isolated a class of mutants with decreased cartilage matrix and increased perichondral bone. Positional cloning identified lesions in two genes, fam20b and xylosyltransferase1 (xylt1), both of which encode PG synthesis enzymes. Mutants failed to produce wild-type levels of chondroitin sulfate PGs, which are normally abundant in cartilage matrix, and initiated perichondral bone formation earlier than their wild-type siblings. Primary chondrocyte defects might induce the bone phenotype secondarily, because mutant chondrocytes precociously initiated maturation, showing increased and early expression of such markers as runx2b, collagen type 10a1, and ihh co-orthologs, and ihha mutation suppressed early perichondral bone in PG mutants. Ultrastructural analyses demonstrated aberrant matrix organization and also early cellular features of chondrocyte hypertrophy in mutants. Refining previous in vitro reports, which demonstrated that fam20b and xylt1 were involved in PG synthesis, our in vivo analyses reveal that these genes function in cartilage matrix production and ultimately regulate the timing of skeletal development.