Heparan sulfate proteoglycans, present on cell surfaces and in the extracellular matrix, interact with growth factors and morphogens to influence growth and differentiation of cells. The sulfation pattern of the heparan sulfate chains formed during biosynthesis in the Golgi compartment will determine the interaction potential of the proteoglycan. The glucosaminyl N-deacetylase/N-sulfotransferase (NDST) enzymes have a key role during biosynthesis, greatly influencing total sulfation of the heparan sulfate chains. The differentiation potential of mouse embryonic stem cells lacking both NDST1 and NDST2 was studied using in vitro differentiation protocols, expression of differentiation markers, and assessment of the ability of the cells to respond to growth factors. The results show that NDST1 and NDST2 are dispensable for mesodermal differentiation into osteoblasts but necessary for induction of adipocytes and neural cells. Gene expression analysis suggested a differentiation block at the primitive ectoderm stage. Also, GATA4, a primitive endoderm marker, was expressed by these cells. The addition of FGF4 or FGF2 together with heparin rescued the differentiation potential to neural progenitors and further to mature neurons and glia. Our results suggest that the embryonic stem cells lacking both NDST1 and NDST2, expressing a very low sulfated heparan sulfate, can take the initial step toward differentiation into all three germ layers. Except for their potential for mesodermal differentiation into osteoblasts, the cells are then arrested in a primitive ectoderm and/or endoderm stage.