This occurred in a U13B game today.

Forward is lined up, even with the 18, but outside of the penalty area, a step offside, with a defender next to him. Through ball is passed beyond both of them. They both run for the ball. As the AR, I am thinking, forward is offside, but lets see who gets to the ball first.

Defender establishes position between the forward and the ball, and attempts to shield the ball over the goal line for a goal kick.

As they both move toward the goal line, following the ball, the center decides the defender is not within playing distance of the ball, whistles, and calls obstruction, awarding an indirect to the attacking team.

But doesn’t awarding obstruction imply the forward would have played the ball, or at a minimum interfered with play, which means he was offside?

USSF answer (March 12, 2011):
Unless we are misreading your question, the referee’s decision would seem to have been incorrect. We recommend for your (and the referee’s) reading this excerpt from the Advice to Referees (2010/2011):

“Interfering with an opponent” means preventing an opponent from playing or being able to play the ball by clearly obstructing the opponent’s line of vision or movements or making a gesture or movement which, in the opinion of the referee, deceives or distracts an opponent. Interference can also include active physical or verbal distraction of the goalkeeper by an opponent as well as blocking the view of the goalkeeper.

A player who is in an offside position when the ball is played toward him by a teammate and who attracts the attention of an opponent, drawing that opponent into pursuit, is guilty of interfering with an opponent.

Referees are reminded that the reference to “playing or touching the ball” (see Advice 11.5 below) does not mean that an offside infringement cannot be called until an attacker in an offside position actually touches the ball. Please note: Here and elsewhere in the guidance for offside, “play,” “touch,” and “make contact with” are used interchangeably (as they are in the Laws of the Game and its Instructions). However, these terms are interchangeable only for the attackers. For the defenders, merely touching the ball is not sufficient in the context of an offside decision — they must actually play (possess and control) the ball, meaning that for them there is indeed a meaningful distinction between “touch” and “play.”

“Touching the ball” is not a requirement for calling an offside infringement if the attacker is interfering with an opponent by making a movement or gesture which, in the opinion of the referee, deceives or distracts that opponent.

According to the IFAB Circular of August 17, 2005: “A player in an offside position may be penalized before playing or touching the ball if, in the opinion of the referee, no other teammate in an onside position has the opportunity to play the ball.” Further, “If an opponent becomes involved in the play and if, in the opinion of the referee, there is potential for physical contact, the player in the offside position shall be penalized for interfering with an opponent.” In addition, referees must remember that the indirect free kick restart for an offside offense is taken “from the initial place where the player was adjudged to be in an offside position.

Therefore, the referee should have called the player in the offside position offside at the moment the defender was distracted by his movement and moved to protect the ball. The indirect free kick would be taken from the place where the forward was when the ball was played by his teammate.

In addition, we must also point out that your reaction—”As the AR, I am thinking, forward is offside, but lets see who gets to the ball first”—was the entirely wrong action to take. In these circumstances, it doesn’t matter who gets to the ball first; that reasoning would be used only when the race is between an offside position attacker and another attacker who started from an onside position. The very fact that the attacker’s action caused a defender to race with him to the ball is sufficient to stop, square, and raise the flag for what would eventually be an offside signal. What happened afterward (the alleged “obstruction”) was not the offense.