We previously identified a mutational hotspot upstream of the Ty1 U5-primer binding site (PBS) border and proposed a novel mechanism to account for this phenomenon during Ty1 replication. In this report, we verify key points of our model and show that in vivo RNase H cleavage of Ty1 RNA during minus-strand strong-stop synthesis creates heterogeneous 5' RNA ends. The preferred cleavage sites closest to the PBS are 6 and 3 bases upstream of the U5-PBS border. Minus-strand cDNA synthesis terminates at multiple sites determined by RNase H cleavage, and DNA intermediates frequently contain 3'-terminal sequence changes at or near their template ends. These data indicate that nontemplated terminal base addition during reverse transcription is a real in vivo phenomenon and suggest that this mechanism is a major source of sequence variability among retrotransposed genetic elements.