diff --git a/src/compiler/program.ts b/src/compiler/program.ts
index b73afe67edc..e9f659792f9 100644
--- a/src/compiler/program.ts
+++ b/src/compiler/program.ts
@@ -869,10 +869,7 @@ namespace ts {
                             ? resolution.resolvedFileName
                             : getNormalizedAbsolutePath(resolution.resolvedFileName, currentDirectory);
 
-                        // convert an absolute import path to path that is relative to current directory
-                        // this was host still can locate it but files names in user output will be shorter (and thus look nicer).
-                        const relativePath = getRelativePathToDirectoryOrUrl(currentDirectory, absoluteImportPath, currentDirectory, getCanonicalFileName, false);
-                        const importedFile = findSourceFile(relativePath, absoluteImportPath, /* isDefaultLib */ false, file, skipTrivia(file.text, file.imports[i].pos), file.imports[i].end);
+                        const importedFile = findSourceFile(resolution.resolvedFileName, absoluteImportPath, /* isDefaultLib */ false, file, skipTrivia(file.text, file.imports[i].pos), file.imports[i].end);
 
                         if (importedFile && resolution.isExternalLibraryImport) {
                             if (!isExternalModule(importedFile)) {
diff --git a/src/compiler/tsc.ts b/src/compiler/tsc.ts
index c493cf8f87f..fc6d65b45e9 100644
--- a/src/compiler/tsc.ts
+++ b/src/compiler/tsc.ts
@@ -81,12 +81,16 @@ namespace ts {
         return <string>diagnostic.messageText;
     }
 
-    function reportDiagnostic(diagnostic: Diagnostic) {
+    function reportDiagnostic(diagnostic: Diagnostic, host: CompilerHost) {
         let output = "";
 
         if (diagnostic.file) {
             let loc = getLineAndCharacterOfPosition(diagnostic.file, diagnostic.start);
-            output += `${ diagnostic.file.fileName }(${ loc.line + 1 },${ loc.character + 1 }): `;
+            const relativeFileName = host
+                ? toRelativePath(diagnostic.file.fileName, host.getCurrentDirectory(), fileName => host.getCanonicalFileName(fileName))
+                : diagnostic.file.fileName;
+
+            output += `${ relativeFileName }(${ loc.line + 1 },${ loc.character + 1 }): `;
         }
 
         let category = DiagnosticCategory[diagnostic.category].toLowerCase();
@@ -95,9 +99,9 @@ namespace ts {
         sys.write(output);
     }
 
-    function reportDiagnostics(diagnostics: Diagnostic[]) {
+    function reportDiagnostics(diagnostics: Diagnostic[], host: CompilerHost) {
         for (let i = 0; i < diagnostics.length; i++) {
-            reportDiagnostic(diagnostics[i]);
+            reportDiagnostic(diagnostics[i], host);
         }
     }
 
@@ -166,7 +170,7 @@ namespace ts {
 
         if (commandLine.options.locale) {
             if (!isJSONSupported()) {
-                reportDiagnostic(createCompilerDiagnostic(Diagnostics.The_current_host_does_not_support_the_0_option, "--locale"));
+                reportDiagnostic(createCompilerDiagnostic(Diagnostics.The_current_host_does_not_support_the_0_option, "--locale"), /* compilerHost */ undefined);
                 return sys.exit(ExitStatus.DiagnosticsPresent_OutputsSkipped);
             }
             validateLocaleAndSetLanguage(commandLine.options.locale, commandLine.errors);
@@ -175,7 +179,7 @@ namespace ts {
         // If there are any errors due to command line parsing and/or
         // setting up localization, report them and quit.
         if (commandLine.errors.length > 0) {
-            reportDiagnostics(commandLine.errors);
+            reportDiagnostics(commandLine.errors, compilerHost);
             return sys.exit(ExitStatus.DiagnosticsPresent_OutputsSkipped);
         }
 
@@ -185,7 +189,7 @@ namespace ts {
         }
 
         if (commandLine.options.version) {
-            reportDiagnostic(createCompilerDiagnostic(Diagnostics.Version_0, ts.version));
+            reportDiagnostic(createCompilerDiagnostic(Diagnostics.Version_0, ts.version), /* compilerHost */ undefined);
             return sys.exit(ExitStatus.Success);
         }
 
@@ -197,12 +201,12 @@ namespace ts {
 
         if (commandLine.options.project) {
             if (!isJSONSupported()) {
-                reportDiagnostic(createCompilerDiagnostic(Diagnostics.The_current_host_does_not_support_the_0_option, "--project"));
+                reportDiagnostic(createCompilerDiagnostic(Diagnostics.The_current_host_does_not_support_the_0_option, "--project"), /* compilerHost */ undefined);
                 return sys.exit(ExitStatus.DiagnosticsPresent_OutputsSkipped);
             }
             configFileName = normalizePath(combinePaths(commandLine.options.project, "tsconfig.json"));
             if (commandLine.fileNames.length !== 0) {
-                reportDiagnostic(createCompilerDiagnostic(Diagnostics.Option_project_cannot_be_mixed_with_source_files_on_a_command_line));
+                reportDiagnostic(createCompilerDiagnostic(Diagnostics.Option_project_cannot_be_mixed_with_source_files_on_a_command_line), /* compilerHost */ undefined);
                 return sys.exit(ExitStatus.DiagnosticsPresent_OutputsSkipped);
             }
         }
@@ -220,7 +224,7 @@ namespace ts {
         // Firefox has Object.prototype.watch
         if (commandLine.options.watch && commandLine.options.hasOwnProperty("watch")) {
             if (!sys.watchFile) {
-                reportDiagnostic(createCompilerDiagnostic(Diagnostics.The_current_host_does_not_support_the_0_option, "--watch"));
+                reportDiagnostic(createCompilerDiagnostic(Diagnostics.The_current_host_does_not_support_the_0_option, "--watch"), /* compilerHost */ undefined);
                 return sys.exit(ExitStatus.DiagnosticsPresent_OutputsSkipped);
             }
             if (configFileName) {
@@ -256,7 +260,7 @@ namespace ts {
             let configObject = result.config;
             let configParseResult = parseJsonConfigFileContent(configObject, sys, getDirectoryPath(configFileName));
             if (configParseResult.errors.length > 0) {
-                reportDiagnostics(configParseResult.errors);
+                reportDiagnostics(configParseResult.errors, /* compilerHost */ undefined);
                 sys.exit(ExitStatus.DiagnosticsPresent_OutputsSkipped);
                 return;
             }
@@ -463,7 +467,7 @@ namespace ts {
                 }
             }
 
-            reportDiagnostics(diagnostics);
+            reportDiagnostics(diagnostics, compilerHost);
 
             // If the user doesn't want us to emit, then we're done at this point.
             if (compilerOptions.noEmit) {
@@ -474,7 +478,7 @@ namespace ts {
 
             // Otherwise, emit and report any errors we ran into.
             let emitOutput = program.emit();
-            reportDiagnostics(emitOutput.diagnostics);
+            reportDiagnostics(emitOutput.diagnostics, compilerHost);
 
             // If the emitter didn't emit anything, then pass that value along.
             if (emitOutput.emitSkipped) {
@@ -587,7 +591,7 @@ namespace ts {
         let currentDirectory = sys.getCurrentDirectory();
         let file = normalizePath(combinePaths(currentDirectory, "tsconfig.json"));
         if (sys.fileExists(file)) {
-            reportDiagnostic(createCompilerDiagnostic(Diagnostics.A_tsconfig_json_file_is_already_defined_at_Colon_0, file));
+            reportDiagnostic(createCompilerDiagnostic(Diagnostics.A_tsconfig_json_file_is_already_defined_at_Colon_0, file), /* compilerHost */ undefined);
         }
         else {
             let compilerOptions = extend(options, defaultInitCompilerOptions);
@@ -602,7 +606,7 @@ namespace ts {
             }
 
             sys.writeFile(file, JSON.stringify(configurations, undefined, 4));
-            reportDiagnostic(createCompilerDiagnostic(Diagnostics.Successfully_created_a_tsconfig_json_file));
+            reportDiagnostic(createCompilerDiagnostic(Diagnostics.Successfully_created_a_tsconfig_json_file), /* compilerHost */ undefined);
         }
 
         return;
diff --git a/src/compiler/utilities.ts b/src/compiler/utilities.ts
index d8de6e0c303..c019bffc812 100644
--- a/src/compiler/utilities.ts
+++ b/src/compiler/utilities.ts
@@ -2183,6 +2183,12 @@ namespace ts {
         return result;
     }
 
+    export function toRelativePath(absoluteOrRelativePath: string, basePath: string, getCanonicalFileName: (path: string) => string): string {
+        return !isRootedDiskPath(absoluteOrRelativePath)
+            ? absoluteOrRelativePath
+            : getRelativePathToDirectoryOrUrl(basePath, absoluteOrRelativePath, basePath, getCanonicalFileName, /* isAbsolutePathAnUrl */ false);
+    }
+
     const carriageReturnLineFeed = "\r\n";
     const lineFeed = "\n";
     export function getNewLineCharacter(options: CompilerOptions): string {
diff --git a/src/harness/projectsRunner.ts b/src/harness/projectsRunner.ts
index 74539b70848..52d4b85f6b8 100644
--- a/src/harness/projectsRunner.ts
+++ b/src/harness/projectsRunner.ts
@@ -234,12 +234,15 @@ class ProjectRunner extends RunnerBase {
             }
 
             function writeFile(fileName: string, data: string, writeByteOrderMark: boolean) {
+                // convert file name to rooted name
+                // if filename is not rooted - concat it with project root and then expand project root relative to current directory
                 let diskFileName = ts.isRootedDiskPath(fileName)
                     ? fileName
-                    : ts.normalizeSlashes(testCase.projectRoot) + "/" + ts.normalizeSlashes(fileName);
+                    : Harness.IO.resolvePath(ts.normalizeSlashes(testCase.projectRoot) + "/" + ts.normalizeSlashes(fileName));
 
-                let diskRelativeName = ts.getRelativePathToDirectoryOrUrl(testCase.projectRoot, diskFileName,
-                    getCurrentDirectory(), Harness.Compiler.getCanonicalFileName, /*isAbsolutePathAnUrl*/ false);
+                let currentDirectory = getCurrentDirectory();
+                // compute file name relative to current directory (expanded project root)
+                let diskRelativeName = ts.getRelativePathToDirectoryOrUrl(currentDirectory, diskFileName, currentDirectory, Harness.Compiler.getCanonicalFileName, /*isAbsolutePathAnUrl*/ false);
                 if (ts.isRootedDiskPath(diskRelativeName) || diskRelativeName.substr(0, 3) === "../") {
                     // If the generated output file resides in the parent folder or is rooted path,
                     // we need to instead create files that can live in the project reference folder
@@ -373,8 +376,12 @@ class ProjectRunner extends RunnerBase {
                             runTest: testCase.runTest,
                             bug: testCase.bug,
                             rootDir: testCase.rootDir,
-                            resolvedInputFiles: ts.map(compilerResult.program.getSourceFiles(), inputFile => inputFile.fileName),
-                            emittedFiles: ts.map(compilerResult.outputFiles, outputFile => outputFile.emittedFileName)
+                            resolvedInputFiles: ts.map(compilerResult.program.getSourceFiles(), inputFile => {
+                                return ts.toRelativePath(inputFile.fileName, getCurrentDirectory(), path => Harness.Compiler.getCanonicalFileName(path));
+                            }),
+                            emittedFiles: ts.map(compilerResult.outputFiles, outputFile => {
+                                return ts.toRelativePath(outputFile.emittedFileName, getCurrentDirectory(), path => Harness.Compiler.getCanonicalFileName(path));
+                            })
                         };
 
                         return resolutionInfo;