Derepression of transposable elements (TEs) in the course of epigenetic reprogramming of the mouse embryonic germline necessitates the existence of a robust defense that is comprised of PIWI/piRNA pathway and de novo DNA methylation machinery. To gain further insight into biogenesis and function of piRNAs, we studied the intracellular localization of piRNA pathway components and used the combination of genetic, molecular, and cell biological approaches to examine the performance of the piRNA pathway in germ cells of mice lacking Maelstrom (MAEL), an evolutionarily conserved protein implicated in transposon silencing in fruit flies and mice. Here we show that principal components of the fetal piRNA pathway, MILI and MIWI2 proteins, localize to two distinct types of germinal cytoplasmic granules and exhibit differential association with components of the mRNA degradation/translational repression machinery. The first type of granules, pi-bodies, contains the MILI-TDRD1 module of the piRNA pathway and is likely equivalent to the enigmatic “cementing material” first described in electron micrographs of rat gonocytes over 35 years ago. The second type of granules, piP-bodies, harbors the MIWI2-TDRD9-MAEL module of the piRNA pathway and signature components of P-bodies, GW182, DCP1a, DDX6/p54, and XRN1 proteins. piP-bodies are found predominantly in the proximity of pi-bodies and the two frequently share mouse VASA homolog (MVH) protein, an RNA helicase. In Mael-mutant gonocytes, MIWI2, TDRD9, and MVH are lost from piP-bodies, whereas no effects on pi-body composition are observed. Further analysis revealed that MAEL appears to specifically facilitate MIWI2-dependent aspects of the piRNA pathway including biogenesis of secondary piRNAs, de novo DNA methylation, and efficient downregulation of TEs. Cumulatively, our data reveal elaborate cytoplasmic compartmentalization of the fetal piRNA pathway that relies on MAEL function. Vast territories of animal genomes are populated by numerous types of mobile genetic elements (or transposons) that act predominantly as selfish parasites unconcerned with the impact of their activity on the well-being of the host. In response to the danger posed by transposons, organisms have evolved a defensive mechanism that employs a particular class of small RNAs known as piRNAs to identify and selectively silence transposons. We have studied the subcellular organization of such a defensive mechanism, the piRNA pathway, in germ cells of mouse male embryos. We discovered that key proteins involved in the genesis of small RNAs, MILI and MIWI2, occupy specific domains within the cytoplasm of germ cells. Surprisingly, MIWI2 shares its domain with proteins known to degrade RNAs and repress synthesis of cellular proteins, thus raising a possibility of cooperation of the two mechanisms in transposon defense. Genetic ablation of MAEL, a protein also found within the MIWI2 domain, disrupts normal MIWI2 localization and piRNA production leading to transposon activation. This study demonstrates that an elaborate compartmentalization of the defensive mechanism is required for the efficient recognition and destruction of active transposons in germ cells of mice.