Patients with insulin resistance often manifest increased intramyocellular lipid (IMCL) along with increased visceral adipose tissue. This study was designed to determine whether the insulin sensitizer drugs pioglitazone and metformin would improve glucose intolerance and insulin sensitivity by decreasing IMCL. In this study, 23 generally healthy subjects with impaired glucose tolerance were randomized to receive either pioglitazone 45 mg/day or metformin 2,000 mg/day for 10 wk. Before and after treatment, we measured insulin sensitivity and abdominal subcutaneous and visceral adipose tissue with CT scanning. In addition, muscle biopsies were performed for measurement of IMCL and muscle oxidative enzymes. After treatment with pioglitazone, 2-h glucose fell from 9.6 mmol/l (172 mg/dl) to 6.1 mmol/l (119 mg/dl), whereas there was no change in 2-h glucose with metformin. With pioglitazone treatment, there was a 65% increase in insulin sensitivity along with a 34% decrease in IMCL (both P ≤ 0.002). This decrease in IMCL was not due to increased muscle lipid oxidation, as there were no changes in muscle lipid oxidative enzymes. However, pioglitazone resulted in a 2.6-kg weight gain along with a significant decrease in the visceral-to-subcutaneous adipose tissue ratio. In contrast, metformin treatment resulted in no change in insulin sensitivity, IMCL, oxidative enzymes, or adipose tissue volumes. Pioglitazone improved glucose tolerance and insulin sensitivity by reducing IMCL. This reduction in IMCL was not due to an increase in muscle lipid oxidation but to a diversion of lipid from ectopic sites into subcutaneous adipose tissue.