During limb skeletogenesis the cartilaginous long bone anlagen and their growth plates become delimited by perichondrium with which they interact functionally. Yet, little is known about how, despite being so intimately associated with cartilage, perichondrium acquires and maintains its distinct phenotype and exerts its border function. Because perichondrium becomes deranged and interrupted by cartilaginous outgrowths in Hereditary Multiple Exostoses (HME), a pediatric disorder caused by EXT mutations and consequent heparan sulfate (HS) deficiency, we asked whether EXT genes and HS normally have roles in establishing its phenotype and function. Indeed, conditional Ext1 ablation in perichondrium and lateral chondrocytes flanking the epiphyseal region of mouse embryo long bone anlagen – a region encompassing the groove of Ranvier – caused ectopic cartilage formation. A similar response was observed when HS function was disrupted in long bone anlagen explants by genetic, pharmacological or enzymatic means, a response preceded by ectopic BMP signaling within perichondrium. These treatments also triggered excess chondrogenesis and cartilage nodule formation and overexpression of chondrogenic and matrix genes in limb bud mesenchymal cells in micromass culture. Interestingly, the treatments disrupted the peripheral definition and border of the cartilage nodules in such a way that many nodules overgrew and fused with each other into large amorphous cartilaginous masses. Interference with HS function reduced the physical association and interactions of BMP2 with HS and increased the cell responsiveness to endogenous and exogenous BMP proteins. In sum, Ext genes and HS are needed to establish and maintain perichondrium's phenotype and border function, restrain pro-chondrogenic signaling proteins including BMPs, and restrict chondrogenesis. Alterations in these mechanisms may contribute to exostosis formation in HME, particularly at the expense of regions rich in progenitor cells including the groove of Ranvier.