In Drosophila, dorsal-ventral polarity is determined by a maternally encoded signal transduction pathway that culminates in the graded nuclear localization of the Rel protein, Dorsal. Dorsal is retained in the cytoplasm by the IkappaB protein, Cactus. Signal-dependent phosphorylation of Cactus results in the degradation of Cactus and the nuclear targeting of Dorsal. We present an in-depth study of the functional importance of Dorsal phosphorylation. We find that Dorsal is phosphorylated by the ventral signal while associated with Cactus, and that Dorsal phosphorylation is essential for its nuclear import. In vivo phospholabeling of Dorsal is limited to serine residues in both ovaries and early embryos. A protein bearing mutations in six conserved serines abolishes Dorsal activity, is constitutively cytoplasmic, and appears to eliminate Dorsal phosphorylation, but still interacts with Cactus. Two individual serine-to-alanine mutations produce unexpected results. In a wild-type signaling background, a mutation in the highly conserved PKA site (S312) produces only a weak loss-of-function; however, it completely destabilizes the protein in a cactus mutant background. Significantly, the phosphorylation of another completely conserved serine (S317) regulates the high level of nuclear import found in ventral cells. We conclude that the formation of a wild-type Dorsal nuclear gradient requires the phosphorylation of both Cactus and Dorsal. The strong conservation of the serines suggests that phosphorylation of other Rel proteins is essential for their proper nuclear targeting.