In protein folding and secretion disorders, activation of endoplasmic reticulum (ER) stress signaling (ERSS) protects cells, alleviating stress that would otherwise trigger apoptosis. Whether the stress-surviving cells resume normal function is not known. We studied the in vivo impact of ER stress in terminally differentiating hypertrophic chondrocytes (HCs) during endochondral bone formation. In transgenic mice expressing mutant collagen X as a consequence of a 13-base pair deletion in Col10a1 (13del), misfolded 1(X) chains accumulate in HCs and elicit ERSS. Histological and gene expression analyses showed that these chondrocytes survived ER stress, but terminal differentiation is interrupted, and endochondral bone formation is delayed, producing a chondrodysplasia phenotype. This altered differentiation involves cell-cycle re-entry, the re-expression of genes characteristic of a prehypertrophic-like state, and is cell-autonomous. Concomitantly, expression of Col10a1 and 13del mRNAs are reduced, and ER stress is alleviated. ERSS, abnormal chondrocyte differentiation, and altered growth plate architecture also occur in mice expressing mutant collagen II and aggrecan. Alteration of the differentiation program in chondrocytes expressing unfolded or misfolded proteins may be part of an adaptive response that facilitates survival and recovery from the ensuing ER stress. However, the altered differentiation disrupts the highly coordinated events of endochondral ossification culminating in chondrodysplasia.