Telomerase is a ribonucleoprotein enzyme that adds repetitive sequences to the ends of linear chromosomes, thereby counteracting nucleotide loss due to incomplete replication. A short region of the telomerase RNA subunit serves as template for nucleotide addition onto the telomere 3' end. Although Saccharomyces cerevisiae contains only one telomerase RNA gene, telomere repeat sequences are degenerate in this organism. Based on a detailed analysis of the telomere sequences specified by wild-type and mutant RNA templates in vivo, we show that the divergence of telomere repeats is due to abortive reverse transcription in the 3' and 5' regions of the template and due to the alignment of telomeres in multiple registers within the RNA template. Through the interpretation of wild-type telomere sequences, we identify nucleotides in the template that are not accessible for base pairing during substrate annealing. Rather, these positions become available as templates for reverse transcription only after alignment with adjacent nucleotides has occurred, indicating that a conformational change takes place upon substrate binding. We also infer that the central part of the template region is reverse transcribed processively. The inaccessibility of certain template positions for alignment and the processive polymerization of the central template portion may serve to reduce the possible repeat diversification and enhance the incorporation of binding sites for Rap1p, the telomere binding protein of budding yeast.