The Rh(II)-catalyzed decomposition of diazoacetylurea 5 gives rise to carbenoid intermediate 7 which can either cyclize to ammonium ylide 6 or to the isomeric carbonyl ylide dipole 8. In the presence of a rhodium catalyst, ammonium ylide 6 rearranges to carbonyl ylide 8 which undergoes 1,3-dipolar cycloaddition reaction with DMAD to give furan 12. (C) 1997 Elsevier Science Ltd.