diff --git a/src/component.js b/src/component.js
index 3d7b55d..e29abae 100644
--- a/src/component.js
+++ b/src/component.js
@@ -1 +1,26 @@
-export default class Component {}
+import { reconcile } from "./reconciler";
+
+export class Component {
+  constructor(props) {
+    this.props = props;
+    this.state = this.state || {};
+  }
+
+  setState(partialState) {
+    this.state = Object.assign({}, this.state, partialState);
+    updateInstance(this.__internalInstance);
+  }
+}
+
+function updateInstance(internalInstance) {
+  const parentDom = internalInstance.dom.parentNode;
+  const element = internalInstance.element;
+  reconcile(parentDom, internalInstance, element);
+}
+
+export function createPublicInstance(element, internalInstance) {
+  const { type, props } = element;
+  const publicInstance = new type(props);
+  publicInstance.__internalInstance = internalInstance;
+  return publicInstance;
+}
diff --git a/src/didact.js b/src/didact.js
index 69663fc..501aad6 100644
--- a/src/didact.js
+++ b/src/didact.js
@@ -1,15 +1,11 @@
-import { createElement } from './element';
-import Component from './component';
-import { render } from './reconciler';
+import { createElement } from "./element";
+import { Component } from "./component";
+import { render } from "./reconciler";
 
 export default {
-	createElement,
-	Component,
-	render
+  createElement,
+  Component,
+  render
 };
 
-export {
-	createElement,
-	Component,
-	render
-};
+export { createElement, Component, render };
diff --git a/src/element.js b/src/element.js
index 3b45acf..88fe167 100644
--- a/src/element.js
+++ b/src/element.js
@@ -1,4 +1,4 @@
-const TEXT_ELEMENT = "TEXT ELEMENT";
+export const TEXT_ELEMENT = "TEXT ELEMENT";
 
 export function createElement(type, config, ...args) {
   const props = Object.assign({}, config);
diff --git a/src/reconciler.js b/src/reconciler.js
index 4b93552..cfd5377 100644
--- a/src/reconciler.js
+++ b/src/reconciler.js
@@ -1,4 +1,6 @@
 import { updateDomProperties } from "./dom-utils";
+import { TEXT_ELEMENT } from "./element";
+import { createPublicInstance } from "./component";
 
 let rootInstance = null;
 
@@ -8,7 +10,7 @@ export function render(element, container) {
   rootInstance = nextInstance;
 }
 
-function reconcile(parentDom, instance, element) {
+export function reconcile(parentDom, instance, element) {
   if (instance == null) {
     // Create instance
     const newInstance = instantiate(element);
@@ -18,17 +20,27 @@ function reconcile(parentDom, instance, element) {
     // Remove instance
     parentDom.removeChild(instance.dom);
     return null;
-  } else if (instance.element.type === element.type) {
-    // Update instance
+  } else if (instance.element.type !== element.type) {
+    // Replace instance
+    const newInstance = instantiate(element);
+    parentDom.replaceChild(newInstance.dom, instance.dom);
+    return newInstance;
+  } else if (typeof element.type === "string") {
+    // Update dom instance
     updateDomProperties(instance.dom, instance.element.props, element.props);
     instance.childInstances = reconcileChildren(instance, element);
     instance.element = element;
     return instance;
   } else {
-    // Replace instance
-    const newInstance = instantiate(element);
-    parentDom.replaceChild(newInstance.dom, instance.dom);
-    return newInstance;
+    //Update composite instance
+    instance.publicInstance.props = element.props;
+    const childElement = instance.publicInstance.render();
+    const oldChildInstance = instance.childInstance;
+    const childInstance = reconcile(parentDom, oldChildInstance, childElement);
+    instance.dom = childInstance.dom;
+    instance.childInstance = childInstance;
+    instance.element = element;
+    return instance;
   }
 }
 
@@ -49,21 +61,33 @@ function reconcileChildren(instance, element) {
 
 function instantiate(element) {
   const { type, props } = element;
+  const isDomElement = typeof type === "string";
 
-  // Create DOM element
-  const isTextElement = type === "TEXT ELEMENT";
-  const dom = isTextElement
-    ? document.createTextNode("")
-    : document.createElement(type);
+  if (isDomElement) {
+    // Instantiate DOM element
+    const isTextElement = type === TEXT_ELEMENT;
+    const dom = isTextElement
+      ? document.createTextNode("")
+      : document.createElement(type);
 
-  updateDomProperties(dom, [], props);
+    updateDomProperties(dom, [], props);
 
-  // Instantiate and append children
-  const childElements = props.children || [];
-  const childInstances = childElements.map(instantiate);
-  const childDoms = childInstances.map(childInstance => childInstance.dom);
-  childDoms.forEach(childDom => dom.appendChild(childDom));
+    const childElements = props.children || [];
+    const childInstances = childElements.map(instantiate);
+    const childDoms = childInstances.map(childInstance => childInstance.dom);
+    childDoms.forEach(childDom => dom.appendChild(childDom));
 
-  const instance = { dom, element, childInstances };
-  return instance;
+    const instance = { dom, element, childInstances };
+    return instance;
+  } else {
+    // Instantiate component element
+    const instance = {};
+    const publicInstance = createPublicInstance(element, instance);
+    const childElement = publicInstance.render();
+    const childInstance = instantiate(childElement);
+    const dom = childInstance.dom;
+
+    Object.assign(instance, { dom, element, childInstance, publicInstance });
+    return instance;
+  }
 }
diff --git a/test/04.components.test.js b/test/04.components.test.js
new file mode 100644
index 0000000..6a540cc
--- /dev/null
+++ b/test/04.components.test.js
@@ -0,0 +1,39 @@
+import test from "ava";
+import browserEnv from "browser-env";
+/** @jsx createElement */
+import { render, createElement, Component } from "../src/didact";
+
+// Create document global var
+browserEnv(["document"]);
+
+test.beforeEach(t => {
+  let root = document.getElementById("root");
+  if (!root) {
+    root = document.createElement("div");
+    root.id = "root";
+    document.body.appendChild(root);
+  }
+  t.context.root = root;
+});
+
+test("render component", t => {
+  const root = t.context.root;
+  class FooComponent extends Component {
+    render() {
+      return <div><b /><a href="foo" /></div>;
+    }
+  }
+  render(<FooComponent />, root);
+  t.is(root.innerHTML, '<div><b></b><a href="foo"></a></div>');
+});
+
+test("render component with props", t => {
+  const root = t.context.root;
+  class FooComponent extends Component {
+    render() {
+      return <div><b>{this.props.name}</b><a href="foo" /></div>;
+    }
+  }
+  render(<FooComponent name="Bar" />, root);
+  t.is(root.innerHTML, '<div><b>Bar</b><a href="foo"></a></div>');
+});
diff --git a/test/05.set-state.test.js b/test/05.set-state.test.js
new file mode 100644
index 0000000..34e1f28
--- /dev/null
+++ b/test/05.set-state.test.js
@@ -0,0 +1,49 @@
+import test from "ava";
+import browserEnv from "browser-env";
+/** @jsx createElement */
+import { render, createElement, Component } from "../src/didact";
+
+// Create document global var
+browserEnv(["document"]);
+
+test.beforeEach(t => {
+  let root = document.getElementById("root");
+  if (!root) {
+    root = document.createElement("div");
+    root.id = "root";
+    document.body.appendChild(root);
+  }
+  t.context.root = root;
+});
+
+test("change state on click", t => {
+  const root = t.context.root;
+  class FooComponent extends Component {
+    constructor(props) {
+      super(props);
+      this.state = {
+        count: 0
+      };
+    }
+
+    handleClick() {
+      this.setState({
+        count: this.state.count + 1
+      });
+    }
+
+    render() {
+      return <div onClick={e => this.handleClick()}>{this.state.count}</div>;
+    }
+  }
+  render(<FooComponent />, root);
+  t.is(root.innerHTML, "<div>0</div>");
+  click(root.firstChild);
+  t.is(root.innerHTML, "<div>1</div>");
+});
+
+function click(dom) {
+  var evt = document.createEvent("MouseEvent");
+  evt.initEvent("click", false, true);
+  dom.dispatchEvent(evt);
+}