Phosphorylation of decorin was investigated by incubating a rat fibroblast cell line with radiolabelled phosphate and carbohydrate precursors. There was a transient phosphorylation of the linkage-region saccharides in intracellular decorin prior to assembly of the galactosaminoglycan chain. Phosphorylation gradually increased from xylosylated, galactosyl-xylosylated to galactosyl-galactosyl-xylosylated core protein where all trisaccharide stubs were phosphorylated. Addition of the first glucuronate residue was accompanied by rapid dephosphorylation. Brefeldin A treatment resulted in segregation of galactosaminoglycan synthesis and dephosphorylation. Enzymatic degradation of brefeldin-A-arrested immature proteoglycan with incomplete galactosaminoglycan chain [Moses, J., Oldberg, A., Eklund, E. & Fransson, L.-A. (1997) Eur. J. Biochem., in the press] by using chondroitin AC lyase and chondro-glycuronidase, followed by beta-galactosidase treatment, demonstrated the sequence galactosyl-galactosyl-phosphoxylose. The xylose was resistant to direct periodate oxidation, but sensitive after treatment with alkaline phosphatase, showing that the phosphate was located at C2 of xylose. The transient 2-phosphorylation of xylose may be involved in intracellular transport and/or in the control of modifications of the glycan chain.