The differentiation and screening methodology proposed here is an efficient in vitro system to screen and study effects of small molecules and bioagents and is an alternative to studies that use live animals and embryos. The method is based on engineering a stable murine embryonic stem (ES) cell line expressing lineage-specific promoters that drive selection and reporter genes. Additionally, uniform embryoid bodies (EBs) are used for differentiation studies that allow synchronous differentiation. The reporter and selection marker genes are expressed only in lineages where the promoter is functional. The differentiated cell type can be identified by reporter gene expression and the selection marker can be used for selective enrichment of that particular cell population. The method described here is useful in screening small molecules or bioagents that can differentiate stem cells into particular lineages or cell types. Identified compounds are useful in areas such as stem cell-based regenerative medicine and therapeutics. The method described here has been applied to neuronal cell differentiation.