The epidemic of childhood obesity has led to a remarkable increase in the prevalence of type 2 diabetes (T2D) among youth worldwide. The decreasing age at onset of T2D has alarming public health implications. In particular, the longer duration of the disease, as well as the faster onset and progression of T2D related complications, will present a considerable burden for young adults and a strain on public health. Therefore, it is important to understand the pathophysiology of early phases of disruption of glucose tolerance and identify those critical points in which diabetes may be prevented. β-Cell dysfunction has been shown to represent one of the key pathogenetic defects underlying the progression to diabetes in obese youth. In the present review, we describe longitudinal and cross-sectional studies of changes in insulin sensitivity and secretion across the spectrum of glucose tolerance in obese adolescents. Further, the role of ectopic fat accumulation is discussed in relation to its association with both β-cell dysfunction and insulin resistance.