Heparan sulfate proteoglycans (HSPGs) are ubiquitous macromolecules. In bone, they are associated with cell surfaces and the extracellular matrix (ECM). The heparan sulfate (HS) chains of HSPGs bind a multitude of bioactive molecules, thereby controlling normal and pathologic processes. The HS‐degrading endoglycosidase, heparanase, has been implicated in processes such as inflammation, vascularization associated with wound healing and malignancies, and cancer metastasis. Here we show progressive mRNA expression of the hpa gene (encoding heparanase) in murine bone marrow stromal cells undergoing osteoblastic (bone forming) differentiation and in primary calvarial osteoblasts. Bone marrow stromal cells derived from transgenic mice expressing recombinant human heparanase (rh‐heparanase) and MC3T3 E1 osteoblastic cells exposed to soluble rh‐heparanase spontaneously undergo osteogenic differentiation. In addition, the transgenic bone marrow stromal cells degrade HS chains. In wild‐type (WT) and hpa‐transgenic (hpa‐tg) mice, heparanase is weakly expressed throughout the bone marrow with a substantial increase in osteoblasts and osteocytes, especially in the hpa‐tg mice. Heparanase expression was absent in osteoclasts. Micro‐computed tomographic and histomorphometric skeletal analyses in male and female hpa‐tg versus WT mice show markedly increased trabecular bone mass, cortical thickness, and bone formation rate, but no difference in osteoclast number. Collectively, our data suggest that proteoglycans tonically suppress osteoblast function and that this inhibition is alleviated by HS degradation with heparanase. J. Cell. Physiol. © 2006 Wiley‐Liss, Inc.