The Drosha-DGCR8 complex initiates microRNA maturation by precise cleavage of the stem loops that are embedded in primary transcripts (pri-miRNAs). Here we propose a model for this process that is based upon evidence from both computational and biochemical analyses. A typical metazoan pri-miRNA consists of a stem of approximately 33 bp, with a terminal loop and flanking segments. The terminal loop is unessential, whereas the flanking ssRNA segments are critical for processing. The cleavage site is determined mainly by the distance (approximately 11 bp) from the stem-ssRNA junction. Purified DGCR8, but not Drosha, interacts with pri-miRNAs both directly and specifically, and the flanking ssRNA segments are vital for this binding to occur. Thus, DGCR8 may function as the molecular anchor that measures the distance from the dsRNA-ssRNA junction. Our current study thus facilitates the prediction of novel microRNAs and will assist in the rational design of small hairpin RNAs for RNA interference.