The peripheral cytoplasm (periplasm) of the Drosophila blastoderm embryo is subdivided into apical and basal compartments by a layer of nuclei. We have demonstrated three classes of periplasmic transcript localization: apical, basal, and unlocalized (apical and basal), each of which depends on 3' sequences. We define 3' apical localization signals within the even-skipped, fushi tarazu, and hairy pair-rule segmentation genes and the alpha 1-tubulin and bicoid genes. 3' human alpha-globin sequences direct transcripts basally. Transcript destination depends on transcript structure, not on transcript stability or chromosomal location. Apical transcripts direct apical compartmentalization of cytoplasmic protein. We propose that apical localization of pair-rule transcripts restricts lateral protein diffusion, thereby allowing pair-rule proteins to define sharp boundaries and precise spatial domains.