diff --git a/src/compiler/commandLineParser.ts b/src/compiler/commandLineParser.ts
index 8dcc21b4d1b..9fec0b1083d 100644
--- a/src/compiler/commandLineParser.ts
+++ b/src/compiler/commandLineParser.ts
@@ -713,6 +713,16 @@ namespace ts {
                     errors.push(createCompilerDiagnostic(Diagnostics.Compiler_option_0_requires_a_value_of_type_1, "exclude", "Array"));
                 }
             }
+            else {
+                // By default, exclude common package folders
+                excludeSpecs = ["node_modules", "bower_components", "jspm_packages"];
+            }
+
+            // Always exclude the output directory unless explicitly included
+            const outDir = json["compilerOptions"] && json["compilerOptions"]["outDir"];
+            if (outDir) {
+                excludeSpecs.push(outDir);
+            }
 
             if (fileNames === undefined && includeSpecs === undefined) {
                 includeSpecs = ["**/*"];
@@ -885,7 +895,6 @@ namespace ts {
      */
     function matchFileNames(fileNames: string[], include: string[], exclude: string[], basePath: string, options: CompilerOptions, host: ParseConfigHost, errors: Diagnostic[]): ExpandResult {
         basePath = normalizePath(basePath);
-        basePath = removeTrailingDirectorySeparator(basePath);
 
         // The exclude spec list is converted into a regular expression, which allows us to quickly
         // test whether a file or directory should be excluded before recursively traversing the
@@ -941,6 +950,10 @@ namespace ts {
                     continue;
                 }
 
+                if (IgnoreFileNamePattern.test(file)) {
+                    continue;
+                }
+
                 // We may have included a wildcard path with a lower priority
                 // extension due to the user-defined order of entries in the
                 // "include" array. If there is a lower priority extension in the
diff --git a/src/compiler/core.ts b/src/compiler/core.ts
index ae489ad553c..cc3c2b28114 100644
--- a/src/compiler/core.ts
+++ b/src/compiler/core.ts
@@ -1067,7 +1067,7 @@ namespace ts {
 
         return basePaths;
     }
-    
+
     export function ensureScriptKind(fileName: string, scriptKind?: ScriptKind): ScriptKind {
         // Using scriptKind as a condition handles both:
         // - 'scriptKind' is unspecified and thus it is `undefined`
diff --git a/src/compiler/sys.ts b/src/compiler/sys.ts
index 3191b8b0056..8e5e76974bf 100644
--- a/src/compiler/sys.ts
+++ b/src/compiler/sys.ts
@@ -367,7 +367,7 @@ namespace ts {
                     const files: string[] = [];
                     const directories: string[] = [];
                     for (const entry of entries) {
-		        // This is necessary because on some file system node fails to exclude
+                        // This is necessary because on some file system node fails to exclude
                         // "." and "..". See https://github.com/nodejs/node/issues/4002
                         if (entry === "." || entry === "..") {
                             continue;
@@ -391,10 +391,6 @@ namespace ts {
             function readDirectory(path: string, extensions?: string[], excludes?: string[], includes?: string[]): string[] {
                 return matchFiles(path, extensions, excludes, includes, useCaseSensitiveFileNames, process.cwd(), getAccessibleFileSystemEntries);
             }
-	    
-	    function getCanonicalPath(path: string): string {
-                return useCaseSensitiveFileNames ? path : path.toLowerCase();
-            }
 
             const enum FileSystemEntryKind {
                 File,
diff --git a/src/services/shims.ts b/src/services/shims.ts
index 0610c0e0b57..ba9ccdce2dc 100644
--- a/src/services/shims.ts
+++ b/src/services/shims.ts
@@ -81,7 +81,7 @@ namespace ts {
          */
         readDirectory(rootDir: string, extension: string, exclude?: string, include?: string, depth?: number): string;
         useCaseSensitiveFileNames?(): boolean;
-	trace(s: string): void;
+        trace(s: string): void;
     }
 
     ///
@@ -432,10 +432,10 @@ namespace ts {
 
         public directoryExists: (directoryName: string) => boolean;
         public realpath: (path: string) => string;
-	    public useCaseSensitiveFileNames: boolean;
+        public useCaseSensitiveFileNames: boolean;
 
         constructor(private shimHost: CoreServicesShimHost) {
-	    this.useCaseSensitiveFileNames = this.shimHost.useCaseSensitiveFileNames ? this.shimHost.useCaseSensitiveFileNames() : false;
+        this.useCaseSensitiveFileNames = this.shimHost.useCaseSensitiveFileNames ? this.shimHost.useCaseSensitiveFileNames() : false;
             if ("directoryExists" in this.shimHost) {
                 this.directoryExists = directoryName => this.shimHost.directoryExists(directoryName);
             }
@@ -453,7 +453,7 @@ namespace ts {
                     JSON.stringify(extensions),
                     JSON.stringify(exclude),
                     JSON.stringify(include),
-		            depth
+                    depth
                 ));
             }
             catch (e) {
diff --git a/tests/cases/unittests/tsconfigParsing.ts b/tests/cases/unittests/tsconfigParsing.ts
index 581575c9479..daa2b2bcdf0 100644
--- a/tests/cases/unittests/tsconfigParsing.ts
+++ b/tests/cases/unittests/tsconfigParsing.ts
@@ -50,27 +50,6 @@ namespace ts {
             const host: ParseConfigHost = new MockParseConfigHost(basePath, true, allFileList);
             const parsed = ts.parseJsonConfigFileContent(json, host, basePath, /*existingOptions*/ undefined, configFileName);
             assert.isTrue(arrayIsEqualTo(parsed.fileNames.sort(), expectedFileList.sort()));
-
-            function mockReadDirectory(rootDir: string, extension: string, exclude: string[]): string[] {
-                const result: string[] = [];
-                const fullExcludeDirectories = ts.map(exclude, directory => combinePaths(rootDir, directory));
-                for (const file of allFileList) {
-                    let shouldExclude = false;
-                    for (const fullExcludeDirectorie of fullExcludeDirectories) {
-                        if (file.indexOf(fullExcludeDirectorie) >= 0) {
-                            shouldExclude = true;
-                            break;
-                        }
-                    }
-                    if (shouldExclude) {
-                        continue;
-                    }
-                    if (fileExtensionIs(file, extension)) {
-                        result.push(file);
-                    }
-                }
-                return result;
-            }
         }
 
         it("returns empty config for file with only whitespaces", () => {