diff --git a/CHANGELOG.md b/CHANGELOG.md
index a39b38a2d9..53664c0412 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -1,5 +1,9 @@
 # Changelog
 
+## 0.3.0+6
+- Convert `packages` paths in the file watcher to their absolute paths. This
+  fixes [#109](https://github.com/dart-lang/build/issues/109).
+
 ## 0.3.0+5
 - Fix duplicate logs issue when running as a BuilderTransformer.  
 
diff --git a/lib/src/generate/watch_impl.dart b/lib/src/generate/watch_impl.dart
index df458d2873..2014d027b0 100644
--- a/lib/src/generate/watch_impl.dart
+++ b/lib/src/generate/watch_impl.dart
@@ -195,17 +195,23 @@ class WatchImpl {
         _logger.fine('Setting up watcher at $absolutePackagePath');
 
         // Ignore all subfolders which are other packages.
-        var pathsToIgnore = absolutePackagePaths.values.where((path) =>
-            path != absolutePackagePath &&
-            path.startsWith(absolutePackagePath));
+        var pathsToIgnore = absolutePackagePaths.values
+            .where((path) =>
+                path != absolutePackagePath &&
+                path.startsWith(absolutePackagePath))
+            .toList();
 
         var watcher = _directoryWatcherFactory(absolutePackagePath);
         watchers.add(watcher);
         _allListeners.add(watcher.events.listen((WatchEvent e) {
+          var changePath = _normalizeChangePath(e.path, absolutePackagePaths);
+          if (changePath == null) return;
+
           // Check for ignored paths and immediately bail.
-          if (pathsToIgnore.any((path) => e.path.startsWith(path))) return;
+          if (pathsToIgnore.any((path) => changePath.startsWith(path))) return;
 
-          var relativePath = path.relative(e.path, from: absolutePackagePath);
+          var relativePath =
+              path.relative(changePath, from: absolutePackagePath);
           _logger.finest(
               'Got ${e.type} event for path $relativePath from ${watcher.path}');
           var id = new AssetId(package.name, relativePath);
@@ -233,4 +239,30 @@ class WatchImpl {
     var node = _assetGraph.get(id);
     return node is GeneratedAssetNode && type != ChangeType.REMOVE;
   }
+
+  // Convert `packages` paths to absolute paths. Returns null if it finds an
+  // invalid package path.
+  String _normalizeChangePath(
+      String changePath, Map<PackageNode, String> absolutePackagePaths) {
+    var changePathParts = path.split(changePath);
+    var packagesIndex = changePathParts.indexOf('packages');
+    if (packagesIndex == -1) return changePath;
+
+    if (changePathParts.length < packagesIndex + 2) {
+      _logger.severe('Invalid change path: $changePath');
+      return null;
+    }
+
+    var packageName = changePathParts[packagesIndex + 1];
+    var packageNode = _packageGraph[packageName];
+    if (packageNode == null) {
+      _logger.severe('Got update for invalid package: $packageName');
+      return null;
+    }
+    var packagePath = absolutePackagePaths[packageNode];
+    var libPath = path.joinAll(['lib']
+      ..addAll(
+          changePathParts.getRange(packagesIndex + 2, changePathParts.length)));
+    return path.join(packagePath, libPath);
+  }
 }
diff --git a/pubspec.yaml b/pubspec.yaml
index 06926248fe..274f77d6e9 100644
--- a/pubspec.yaml
+++ b/pubspec.yaml
@@ -1,5 +1,5 @@
 name: build
-version: 0.3.0+5
+version: 0.3.0+6
 description: A build system for Dart.
 author: Dart Team <misc@dartlang.org>
 homepage: https://github.com/dart-lang/build
diff --git a/test/generate/watch_test.dart b/test/generate/watch_test.dart
index df6433f19e..5d2741a8d8 100644
--- a/test/generate/watch_test.dart
+++ b/test/generate/watch_test.dart
@@ -181,6 +181,23 @@ void main() {
         // matches the input set.
         checkOutputs({'a|web/a.txt.copy': 'b',}, result, writer.assets);
       });
+
+      test('converts packages paths to absolute ones', () async {
+        var writer = new InMemoryAssetWriter();
+        var results = <BuildResult>[];
+        startWatch(copyAPhaseGroup, {'a|lib/a.txt': 'a'}, writer)
+            .listen(results.add);
+
+        var result = await nextResult(results);
+        checkOutputs({'a|lib/a.txt.copy': 'a',}, result, writer.assets);
+
+        await writer.writeAsString(makeAsset('a|lib/a.txt', 'b'));
+        FakeWatcher.notifyWatchers(new WatchEvent(
+            ChangeType.MODIFY, path.absolute('a', 'packages', 'a', 'a.txt')));
+
+        result = await nextResult(results);
+        checkOutputs({'a|lib/a.txt.copy': 'b',}, result, writer.assets);
+      });
     });
 
     group('multiple phases', () {