The mechanism of action of CS-045, a new orally active antidiabetic agent, was studied in vitro using cultured hepatoma cells (Hep G2) and muscle cells (BC3H-1). Treatment of both types of cultured cells with varying doses of CS-045 did not significantly alter insulin receptor binding. Basal and insulin-stimulated glucose transport in BC3H-1 cells was also unaltered by the drug. In contrast, CS-045 increased glycogen synthase I activity in both cell types. This effect was maximal after 24 hours and in Hep G2 cells was associated with a threefold increase in the apparent affinity of the enzyme for glucose-6-phosphate. Gluconeogenesis from lactate in Hep G2 cells was greatly reduced by CS-045 treatment. We conclude that CS-045 may act directly on muscle and liver cells to increase glucose utilization. It is also effective in reducing glucose production. These multiple effects may account in part for the ability of CS-045 to reduce blood sugar levels in vivo.