Bacteria contain transfer-messenger RNA (tmRNA), a molecule that during trans-translation tags incompletely translated proteins with a small peptide to signal the proteolytic destruction of defective polypeptides. TmRNA is composed of tRNA- and mRNA-like domains connected by several pseudoknots. Using truncated ribosomal protein L27 as a reporter for tagging in vitro and in vivo, we have developed exceptionally sensitive assays to study the role of Escherichia coli tmRNA in trans-translation. Site-directed mutagenesis experiments showed that pseudoknot 2 and the abutting helix 5 were particularly important for the binding of ribosomal protein S1 to tmRNA. Pseudoknot 4 not only facilitated tmRNA maturation but also promoted tagging. In addition, the three pseudoknots (pk2 to pk4) were shown to play a significant role in the proper folding of the tRNA-like domain. Protein SmpB enhanced tmRNA processing, suggesting a new role for SmpB in trans-translation. Taken together, these results provide unanticipated insights into the functions of the pseudoknots and protein SmpB during tmRNA folding, maturation, and protein synthesis.