Despite evidence of insulin resistance and β-cell dysfunction in glucose metabolism in youth with prediabetes, the relationship between adipose tissue insulin sensitivity (ATIS) and β-cell function remains unknown. We investigated whole-body lipolysis, ATIS, and β-cell function relative to ATIS (adipose disposition index [DI]) in obese youth with impaired glucose tolerance (IGT) versus normal glucose tolerance (NGT). Whole-body lipolysis (glycerol appearance rate [GlyRa], [²H₅]glycerol at baseline and during a hyperinsulinemic-euglycemic clamp), lipid oxidation (indirect calorimetry), insulin secretion (2-h hyperglycemic clamp), and body composition (dual-energy X-ray absorptiometry) were examined. Adipose DI was calculated as ATIS: (1/GlyRa × fasting insulin) × first-phase insulin secretion. Despite similar percent body fat, youth with IGT versus NGT had higher GlyRa, lower ATIS at baseline and during hyperinsulinemia, and higher lipid oxidation. Adipose DI was ∼43% lower in youth with IGT and correlated positively with glucose DI. The lower ATIS and diminished adipose DI in IGT versus NGT is in line with the compromised glucose metabolism reflected in impaired β-cell function relative to peripheral insulin resistance. We conclude that youth with IGT manifest a global decline in insulin sensitivity, including impaired insulin action in suppressing lipolysis and lipid oxidation, accompanied by β-cell dysfunction in fat and glucose metabolism, enhancing their risk of type 2 diabetes.