N-Acetylglucosamine-1-phosphodiester alpha-N-acetylglucosaminidase, also known as "uncovering" enzyme (UCE), is localized in the trans-Golgi network, where it removes a covering N-acetylglucosamine from the mannose 6-phosphate recognition marker on lysosomal acid hydrolases. Here we show that UCE is synthesized as an inactive proenzyme that is activated by the endoprotease furin, which cleaves an RARLPR/D sequence to release a 24-amino acid propiece. As furin is localized in the trans-Golgi network, newly synthesized UCE is inactive until it reaches this terminal Golgi compartment. LoVo cells (derived from a human colon adenocarcinoma) lack furin activity and have extremely low UCE activity. Addition of furin to LoVo cell extracts restores UCE activity to normal levels, demonstrating that the UCE proenzyme is stable in this cell type. LoVo cells secrete acid hydrolases with phosphomannose diesters as a consequence of the deficient UCE activity. This demonstrates for the first time that UCE is the only enzyme in these cells capable of efficiently uncovering phosphomannose diesters. UCE also hydrolyzes UDP-GlcNAc, a sugar donor for Golgi N-acetylglucosaminyltransferases. The fact that UCE is not activated until it reaches the trans-Golgi network may ensure that the pool of UDP-GlcNAc in the Golgi stack is not depleted, thereby maintaining proper oligosaccharide assembly.