A cell-based method for screening drug candidates from herbal extracts that have possible anti-type II diabetic effects was established. The differentiation of preadipocytes into adipocytes was used as a sensitive primary indicator of a drug's potential effect on type II diabetes. We established a quantitative method by using a computer image analysis system for assessing the morphological alterations. The assay was validated by screening compounds extracted from Chinese herbs and the known drug rosiglitazone for their capability of modulating PPARgamma gene expression and glucose uptake by adipocytes. Two drug candidates having possible anti-type II diabetic effects were identified.