It is shown here that maturation of the m7G-capped precursors of U3 small nuclear RNA (snRNA) occurs by a previously unknown pathway. In contrast to the 5' m7G-capped precursors of other snRNAs, this RNA is not exported to the cytoplasm but is retained in the nuclei of Xenopus laevis oocytes, where it undergoes trimethylation of its 5' cap. The m7G caps of most snRNA precursors are trimethylated only after transport of the RNAs to the cytoplasm. The nuclear retention and maturation of this nucleolar RNA raises the possibility that other m7G-capped RNAs are also retained and modified in the nucleus.