The 5'-->3' exoribonucleases (XRNs) comprise a large family of conserved enzymes in eukaryotes with crucial functions in RNA metabolism and RNA interference. XRN2, or Rat1 in yeast, functions primarily in the nucleus and also has an important role in transcription termination by RNA polymerase II (refs 7-14). Rat1 exoribonuclease activity is stimulated by the protein Rai1 (refs 15, 16). Here we report the crystal structure at 2.2 A resolution of Schizosaccharomyces pombe Rat1 in complex with Rai1, as well as the structures of Rai1 and its murine homologue Dom3Z alone at 2.0 A resolution. The structures reveal the molecular mechanism for the activation of Rat1 by Rai1 and for the exclusive exoribonuclease activity of Rat1. Biochemical studies confirm these observations, and show that Rai1 allows Rat1 to degrade RNAs with stable secondary structure more effectively. There are large differences in the active site landscape of Rat1 compared to related and PIN (PilT N terminus) domain-containing nucleases. Unexpectedly, we identified a large pocket in Rai1 and Dom3Z that contains highly conserved residues, including three acidic side chains that coordinate a divalent cation. Mutagenesis and biochemical studies demonstrate that Rai1 possesses pyrophosphohydrolase activity towards 5' triphosphorylated RNA. Such an activity is important for messenger RNA degradation in bacteria, but this is, to our knowledge, the first demonstration of this activity in eukaryotes and suggests that Rai1/Dom3Z may have additional important functions in RNA metabolism.