Transforming growth factor-beta (TGF-beta) signaling is crucial for mandible development. During its development, the majority of the mandible is formed through intramembranous ossification whereas the proximal region of the mandible undergoes endochondral ossification. Our previous work has shown that TGF-beta signaling is required for the proliferation of cranial neural crest (CNC)-derived ectomesenchyme in the mandibular primordium where intramembranous ossification takes place. Here we show that conditional inactivation of Tgfbr2 in CNC cells results in accelerated osteoprogenitor differentiation and perturbed chondrogenesis in the proximal region of the mandible. Specifically, the appearance of chondrocytes in Tgfbr2(fl/fl);Wnt1-Cre mice is delayed and they are smaller in size in the condylar process and completely missing in the angular process. TGF-beta signaling controls Sox9 expression in the proximal region, because Sox9 expression is delayed in condylar processes and missing in angular process in Tgfbr2(fl/fl);Wnt1-Cre mice. Moreover, exogenous TGF-beta can induce Sox9 expression in the mandibular arch. In the angular processes of Tgfbr2(fl/fl);Wnt1-Cre mice, osteoblast differentiation is accelerated and Dlx5 expression is elevated. Significantly, deletion of Dlx5 in Tgfbr2(fl/fl);Wnt1-Cre mice results in the rescue of cartilage formation in the angular processes. Finally, TGF-beta signaling-mediated Scleraxis expression is required for tendonogenesis in the developing skeletal muscle. Thus, CNC-derived cells in the proximal region of mandible have a cell intrinsic requirement for TGF-beta signaling.