diff --git a/src/compiler/sys.ts b/src/compiler/sys.ts
index 0c500d5500e..bcf71b4016a 100644
--- a/src/compiler/sys.ts
+++ b/src/compiler/sys.ts
@@ -2,7 +2,7 @@
 
 namespace ts {
     export type FileWatcherCallback = (fileName: string, removed?: boolean) => void;
-    export type DirectoryWatcherCallback = (directoryName: string) => void;
+    export type DirectoryWatcherCallback = (fileName: string) => void;
     export interface WatchedFile {
         fileName: string;
         callback: FileWatcherCallback;
diff --git a/tests/cases/unittests/tsserverProjectSystem.ts b/tests/cases/unittests/tsserverProjectSystem.ts
index c69821ced5f..e5b140237e5 100644
--- a/tests/cases/unittests/tsserverProjectSystem.ts
+++ b/tests/cases/unittests/tsserverProjectSystem.ts
@@ -107,6 +107,30 @@ namespace ts {
         }
     }
 
+    function checkConfiguredProjectNumber(projectService: server.ProjectService, expected: number) {
+        assert.equal(projectService.configuredProjects.length, expected, `expected ${expected} configured project(s)`);
+    }
+
+    function checkInferredProjectNumber(projectService: server.ProjectService, expected: number) {
+        assert.equal(projectService.inferredProjects.length, expected, `expected ${expected} inferred project(s)`);
+    }
+
+    function checkWatchedFiles(host: TestServerHost, expectedFiles: string[]) {
+        checkMapKeys("watchedFiles", host.watchedFiles, expectedFiles);
+    }
+
+    function checkWatchedDirectories(host: TestServerHost, expectedDirectories: string[]) {
+        checkMapKeys("watchedDirectories", host.watchedDirectories, expectedDirectories);
+    }
+
+    function checkConfiguredProjectActualFiles(project: server.Project, expectedFiles: string[]) {
+        checkFileNames("configuredProjects project, actualFileNames", project.getFileNames(), expectedFiles);
+    }
+
+    function checkConfiguredProjectRootFiles(project: server.Project, expectedFiles: string[]) {
+        checkFileNames("configuredProjects project, rootFileNames", project.getRootFiles(), expectedFiles);
+    }
+
     class TestServerHost implements server.ServerHost {
         args: string[] = [];
         newLine: "\n";
@@ -188,6 +212,26 @@ namespace ts {
             };
         }
 
+        triggerDirectoryWatcherCallback(directoryName: string, fileName: string): void {
+            const path = this.toPath(directoryName);
+            const callbacks = lookUp(this.watchedDirectories, path);
+            if (callbacks) {
+                for (const callback of callbacks) {
+                    callback.cb(fileName);
+                }
+            }
+        }
+
+        triggerFileWatcherCallback(fileName: string): void {
+            const path = this.toPath(fileName);
+            const callbacks = lookUp(this.watchedFiles, path);
+            if (callbacks) {
+                for (const callback of callbacks) {
+                    callback(path, /*removed*/ true);
+                }
+            }
+        }
+
         watchFile(fileName: string, callback: FileWatcherCallback) {
             const path = this.toPath(fileName);
             const callbacks = lookUp(this.watchedFiles, path) || (this.watchedFiles[path] = []);
@@ -204,7 +248,7 @@ namespace ts {
         }
 
         // TOOD: record and invoke callbacks to simulate timer events
-        readonly setTimeout = (callback: (...args: any[]) => void, ms: number, ...args: any[]): any => void 0;
+        readonly setTimeout = setTimeout;
         readonly clearTimeout = (timeoutId: any): void => void 0;
         readonly readFile = (s: string) => (<File>this.fs.get(this.toPath(s))).content;
         readonly resolvePath = (s: string) => s;
@@ -216,7 +260,20 @@ namespace ts {
         readonly exit = () => notImplemented();
     }
 
-    describe("tsserver project system:", () => {
+    describe("tsserver-project-system", () => {
+        const commonFile1: FileOrFolder = {
+            path: "/a/b/commonFile1.ts",
+            content: "let x = 1"
+        };
+        const commonFile2: FileOrFolder = {
+            path: "/a/b/commonFile2.ts",
+            content: "let y = 1"
+        };
+        const libFile: FileOrFolder = {
+            path: "/a/lib/lib.d.ts",
+            content: libFileContent
+        };
+
         it("create inferred project", () => {
             const appFile: FileOrFolder = {
                 path: "/a/b/c/app.ts",
@@ -225,10 +282,7 @@ namespace ts {
                 console.log(f)
                 `
             };
-            const libFile: FileOrFolder = {
-                path: "/a/lib/lib.d.ts",
-                content: libFileContent
-            };
+
             const moduleFile: FileOrFolder = {
                 path: "/a/b/c/module.d.ts",
                 content: `export let x: number`
@@ -238,13 +292,13 @@ namespace ts {
             const { configFileName } = projectService.openClientFile(appFile.path);
 
             assert(!configFileName, `should not find config, got: '${configFileName}`);
-            assert.equal(projectService.inferredProjects.length, 1, "expected one inferred project");
-            assert.equal(projectService.configuredProjects.length, 0, "expected no configured project");
+            checkConfiguredProjectNumber(projectService, 0);
+            checkInferredProjectNumber(projectService, 1);
 
             const project = projectService.inferredProjects[0];
 
             checkFileNames("inferred project", project.getFileNames(), [appFile.path, libFile.path, moduleFile.path]);
-            checkMapKeys("watchedDirectories", host.watchedDirectories, ["/a/b/c", "/a/b", "/a"]);
+            checkWatchedDirectories(host, ["/a/b/c", "/a/b", "/a"]);
         });
 
         it("create configured project without file list", () => {
@@ -258,10 +312,6 @@ namespace ts {
                     ]
                 }`
             };
-            const libFile: FileOrFolder = {
-                path: "/a/lib/lib.d.ts",
-                content: libFileContent
-            };
             const file1: FileOrFolder = {
                 path: "/a/b/c/f1.ts",
                 content: "let x = 1"
@@ -274,21 +324,130 @@ namespace ts {
                 path: "/a/b/e/f3.ts",
                 content: "let z = 1"
             };
+
             const host = new TestServerHost(/*useCaseSensitiveFileNames*/ false, getExecutingFilePathFromLibFile(libFile), "/", [ configFile, libFile, file1, file2, file3 ]);
             const projectService = new server.ProjectService(host, nullLogger);
             const { configFileName, configFileErrors } = projectService.openClientFile(file1.path);
 
             assert(configFileName, "should find config file");
             assert.isTrue(!configFileErrors, `expect no errors in config file, got ${JSON.stringify(configFileErrors)}`);
-            assert.equal(projectService.inferredProjects.length, 0, "expected no inferred project");
-            assert.equal(projectService.configuredProjects.length, 1, "expected one configured project");
+            checkInferredProjectNumber(projectService, 0);
+            checkConfiguredProjectNumber(projectService, 1);
 
             const project = projectService.configuredProjects[0];
-            checkFileNames("configuredProjects project, actualFileNames", project.getFileNames(), [file1.path, libFile.path, file2.path]);
-            checkFileNames("configuredProjects project, rootFileNames", project.getRootFiles(), [file1.path, file2.path]);
+            checkConfiguredProjectActualFiles(project, [file1.path, libFile.path, file2.path]);
+            checkConfiguredProjectRootFiles(project, [file1.path, file2.path]);
+            // watching all files except one that was open
+            checkWatchedFiles(host, [configFile.path, file2.path, libFile.path]);
+            checkWatchedDirectories(host, [getDirectoryPath(configFile.path)]);
+        });
 
-            checkMapKeys("watchedFiles", host.watchedFiles, [configFile.path, file2.path, libFile.path]); // watching all files except one that was open
-            checkMapKeys("watchedDirectories", host.watchedDirectories, [getDirectoryPath(configFile.path)]);
+        it("add and then remove a config file in a folder with loose files", () => {
+            const configFile: FileOrFolder = {
+                path: "/a/b/tsconfig.json",
+                content: `{
+                    "files": ["commonFile1.ts"]
+                }`
+            };
+            const filesWithoutConfig = [ libFile, commonFile1, commonFile2 ];
+            const filesWithConfig = [ libFile, commonFile1, commonFile2, configFile ];
+            const host = new TestServerHost(/*useCaseSensitiveFileNames*/ false, getExecutingFilePathFromLibFile(libFile), "/", filesWithoutConfig);
+            const projectService = new server.ProjectService(host, nullLogger);
+            projectService.openClientFile(commonFile1.path);
+            projectService.openClientFile(commonFile2.path);
+
+            checkInferredProjectNumber(projectService, 2);
+            checkWatchedDirectories(host, ["/a/b", "/a"]);
+
+            // Add a tsconfig file
+            host.reloadFS(filesWithConfig);
+            host.triggerDirectoryWatcherCallback("/a/b", configFile.path);
+
+            checkInferredProjectNumber(projectService, 1);
+            checkConfiguredProjectNumber(projectService, 1);
+            // watching all files except one that was open
+            checkWatchedFiles(host, [libFile.path, configFile.path]);
+
+            // remove the tsconfig file
+            host.reloadFS(filesWithoutConfig);
+            host.triggerFileWatcherCallback(configFile.path);
+            checkInferredProjectNumber(projectService, 2);
+            checkConfiguredProjectNumber(projectService, 0);
+            checkWatchedDirectories(host, ["/a/b", "/a"]);
+        });
+
+        it("add new files to a configured project without file list", (done: () => void) => {
+            const configFile: FileOrFolder = {
+                path: "/a/b/tsconfig.json",
+                content: `{}`
+            };
+            const host = new TestServerHost(/*useCaseSensitiveFileNames*/ false, getExecutingFilePathFromLibFile(libFile), "/", [commonFile1, libFile, configFile]);
+            const projectService = new server.ProjectService(host, nullLogger);
+            projectService.openClientFile(commonFile1.path);
+            checkWatchedDirectories(host, ["/a/b"]);
+            checkConfiguredProjectNumber(projectService, 1);
+
+            const project = projectService.configuredProjects[0];
+            checkConfiguredProjectRootFiles(project, [commonFile1.path]);
+
+            // add a new ts file
+            host.reloadFS([commonFile1, commonFile2, libFile, configFile]);
+            host.triggerDirectoryWatcherCallback("/a/b", commonFile2.path);
+            // project service waits for 250ms to update the project structure, therefore the assertion needs to wait longer.
+            setTimeout(() => {
+                checkConfiguredProjectRootFiles(project, [commonFile1.path, commonFile2.path]);
+                done();
+            }, 1000);
+        });
+
+        it("should ignore non-existing files specified in the config file", () => {
+            const configFile: FileOrFolder = {
+                path: "/a/b/tsconfig.json",
+                content: `{
+                    "compilerOptions": {},
+                    "files": [
+                        "commonFile1.ts",
+                        "commonFile3.ts"
+                    ]
+                }`
+            };
+            const host = new TestServerHost(/*useCaseSensitiveFileNames*/ false, getExecutingFilePathFromLibFile(libFile), "/", [commonFile1, commonFile2, configFile]);
+            const projectService = new server.ProjectService(host, nullLogger);
+            projectService.openClientFile(commonFile1.path);
+            projectService.openClientFile(commonFile2.path);
+
+            checkConfiguredProjectNumber(projectService, 1);
+            const project = projectService.configuredProjects[0];
+            checkConfiguredProjectRootFiles(project, [commonFile1.path]);
+            checkInferredProjectNumber(projectService, 1);
+        });
+
+        it("handle recreated files correctly", (done: () => void) => {
+            const configFile: FileOrFolder = {
+                path: "/a/b/tsconfig.json",
+                content: `{}`
+            };
+            const host = new TestServerHost(/*useCaseSensitiveFileNames*/ false, getExecutingFilePathFromLibFile(libFile), "/", [commonFile1, commonFile2, configFile]);
+            const projectService = new server.ProjectService(host, nullLogger);
+            projectService.openClientFile(commonFile1.path);
+
+            checkConfiguredProjectNumber(projectService, 1);
+            const project = projectService.configuredProjects[0];
+            checkConfiguredProjectRootFiles(project, [commonFile1.path, commonFile2.path]);
+
+            // delete commonFile1
+            projectService.closeClientFile(commonFile1.path);
+            host.reloadFS([configFile]);
+            host.triggerDirectoryWatcherCallback("/a/b", commonFile1.path);
+            host.setTimeout(() => {
+                // re-add commonFile1
+                host.reloadFS([commonFile1, configFile]);
+                projectService.openClientFile(commonFile1.path);
+                host.setTimeout(() => {
+                    checkConfiguredProjectRootFiles(project, [commonFile1.path, commonFile2.path]);
+                    done();
+                }, 500);
+            }, 500);
         });
     });
 }
\ No newline at end of file