Many small nucleolar RNAs (snoRNAs) in vertebrates are encoded within introns of protein genes. We have reported previously that two isoforms of human U17 snoRNA are encoded in introns of the cell-cycle regulatory gene, RCC1. We have now investigated the mechanism of processing of U17 RNAs and of another intron-encoded snoRNA, U19. Experiments in which the processing of intronic RNA substrates was tested in HeLa cell extracts suggest that exonucleases rather than endonucleases are involved in the excision of U17 and U19 RNAs: (1) Cutoff products that would be expected from endonucleolytic cleavages were not detected; (2) capping or circularization of substrates inhibited formation of snoRNAs; and (3) U17 RNA was faithfully processed from a substrate carrying unrelated flanking sequences. To study in vivo processing the coding regions of snoRNAs were inserted into intron 2 of the human beta-globin gene. Expression of resulting pre-mRNAs in simian COS cells resulted in formation of correctly processed snoRNAs and of the spliced globin mRNA, demonstrating that snoRNAs can be excised from a nonhost intron and that their sequences contain all the signals essential for accurate processing. When the U17 sequence was placed in a beta-globin exon, no formation of U17 RNA took place, and when two U17 RNA-coding regions were placed in a single intron, doublet U17 RNA molecules accumulated. The results support a model according to which 5'-->3' and 3'-->5' exonucleases are involved in maturation of U17 and U19 RNAs and that excised and debranched introns are the substrates of the processing reaction.