Cyanobacteria are a rich source of natural products and are known to produce terpenoids. These bacteria are the major source of the musty-smelling terpenes geosmin and 2-methylisoborneol, which are found in many natural water supplies; however, no terpene synthases have been characterized from these organisms to date. Here, we describe the characterization of three sesquiterpene synthases identified in Nostoc sp. strain PCC 7120 (terpene synthase NS1) and Nostoc punctiforme PCC 73102 (terpene synthases NP1 and NP2). The second terpene synthase in N. punctiforme (NP2) is homologous to fusion-type sesquiterpene synthases from Streptomyces spp. shown to produce geosmin via an intermediate germacradienol. The enzymes were functionally expressed in Escherichia coli, and their terpene products were structurally identified as germacrene A (from NS1), the eudesmadiene 8a-epi-α-selinene (from NP1), and germacradienol (from NP2). The product of NP1, 8a-epi-α-selinene, so far has been isolated only from termites, in which it functions as a defense compound. Terpene synthases NP1 and NS1 are part of an apparent minicluster that includes a P450 and a putative hybrid two-component protein located downstream of the terpene synthases. Coexpression of P450 genes with their adjacent located terpene synthase genes in E. coli demonstrates that the P450 from Nostoc sp. can be functionally expressed in E. coli when coexpressed with a ferredoxin gene and a ferredoxin reductase gene from Nostoc and that the enzyme oxygenates the NS1 terpene product germacrene A. This represents to the best of our knowledge the first example of functional expression of a cyanobacterial P450 in JB. coli.