Telomeres cap the ends of chromosomes and provide a means to complete replication. The DNA portion of telomeres is synthesized by the enzyme telomerase using part of an RNA subunit as a template for reverse transcription. How the mature 3' end of telomerase RNA is generated has so far remained elusive. Here we show that in Schizosaccharomyces pombe telomerase RNA transcripts must be processed to generate functional telomerase. Characterization of the maturation pathway uncovered an unexpected role for the spliceosome, which normally catalyses splicing of pre-messenger RNA. The first spliceosomal cleavage reaction generates the mature 3' end of telomerase RNA (TER1, the functional RNA encoded by the ter1(+) gene), releasing the active form of the RNA without exon ligation. Blocking the first step or permitting completion of splicing generates inactive forms of TER1 and causes progressive telomere shortening. We establish that 3' end processing of TER1 is critical for telomerase function and describe a previously unknown mechanism for RNA maturation that uses the ability of the spliceosome to mediate site-specific cleavage.