Processing of telomeric DNA is required to generate the 3' G strand overhangs necessary for capping chromosome ends. We have investigated the steps involved in telomere processing by examining G overhang structure in Tetrahymena cells that lack telomerase or have altered telomeric sequences. We show that overhangs are generated by two precise cleavage steps involving nucleases that are robust but lack sequence specificity. Our data suggest that a G overhang binding protein delineates the boundaries for G and C strand cleavage. We also show that telomerase is not the nuclease responsible for G strand cleavage, although telomerase depletion alters the precision of processing. This change in processing indicates that telomerase affects multiple transactions at the telomere and provides a physical footprint for the continued association of telomerase with the telomere after repeat addition is complete.