diff --git a/src/compiler/core.ts b/src/compiler/core.ts
index c492ab9c43..58cf33c6fd 100644
--- a/src/compiler/core.ts
+++ b/src/compiler/core.ts
@@ -152,7 +152,31 @@ module ts {
 
     export function mapToArray<T>(map: Map<T>): T[] {
         var result: T[] = [];
-        for (var id in map) result.push(map[id]);
+
+        for (var id in map) {
+            result.push(map[id]);
+        }
+
+        return result;
+    }
+
+    /**
+     * Creates a map from the elements of an array.
+     *
+     * @param array the array of input elements.
+     * @param makeKey a function that produces a key for a given element.
+     *
+     * This function makes no effort to avoid collisions; if any two elements produce
+     * the same key with the given 'makeKey' function, then the element with the higher
+     * index in the array will be the one associated with the produced key.
+     */
+    export function arrayToMap<T>(array: T[], makeKey: (value: T) => string): Map<T> {
+        var result: Map<T> = {};
+
+        forEach(array, value => {
+            result[makeKey(value)] = value
+        });
+
         return result;
     }
 
diff --git a/src/compiler/tc.ts b/src/compiler/tc.ts
index 5009e4c7a9..9c77211525 100644
--- a/src/compiler/tc.ts
+++ b/src/compiler/tc.ts
@@ -245,14 +245,14 @@ module ts {
 
         function addWatchers(program: Program) {
             forEach(program.getSourceFiles(), f => {
-                var filename = f.filename;
+                var filename = getCanonicalName(f.filename);
                 watchers[filename] = sys.watchFile(filename, fileUpdated);
             });
         }
 
         function removeWatchers(program: Program) {
             forEach(program.getSourceFiles(), f => {
-                var filename = f.filename;
+                var filename = getCanonicalName(f.filename);
                 if (hasProperty(watchers, filename)) {
                     watchers[filename].close();
                 }
@@ -264,8 +264,7 @@ module ts {
         // Fired off whenever a file is changed.
         function fileUpdated(filename: string) {
             var firstNotification = isEmpty(updatedFiles);
-
-            updatedFiles[filename] = true;
+            updatedFiles[getCanonicalName(filename)] = true;
 
             // Only start this off when the first file change comes in,
             // so that we can batch up all further changes.
@@ -285,8 +284,10 @@ module ts {
             // specified since the last compilation cycle.
             removeWatchers(program);
 
-            // Gets us syntactically correct files from the last compilation.
-            var getUnmodifiedSourceFile = program.getSourceFile;
+            // Reuse source files from the last compilation so long as they weren't changed.
+            var oldSourceFiles = arrayToMap(
+                filter(program.getSourceFiles(), file => !hasProperty(changedFiles, getCanonicalName(file.filename))),
+                file => getCanonicalName(file.filename));
 
             // We create a new compiler host for this compilation cycle.
             // This new host is effectively the same except that 'getSourceFile'
@@ -294,11 +295,11 @@ module ts {
             // so long as they were not modified.
             var newCompilerHost = clone(compilerHost);
             newCompilerHost.getSourceFile = (fileName, languageVersion, onError) => {
-                if (!hasProperty(changedFiles, fileName)) {
-                    var sourceFile = getUnmodifiedSourceFile(fileName);
-                    if (sourceFile) {
-                        return sourceFile;
-                    }
+                fileName = getCanonicalName(fileName);
+
+                var sourceFile = lookUp(oldSourceFiles, fileName);
+                if (sourceFile) {
+                    return sourceFile;
                 }
 
                 return compilerHost.getSourceFile(fileName, languageVersion, onError);
@@ -308,6 +309,10 @@ module ts {
             reportDiagnostic(createCompilerDiagnostic(Diagnostics.Compilation_complete_Watching_for_file_changes));
             addWatchers(program);
         }
+
+        function getCanonicalName(fileName: string) {
+            return compilerHost.getCanonicalFileName(fileName);
+        }
     }
 
     function compile(commandLine: ParsedCommandLine, compilerHost: CompilerHost) {