diff --git a/doc/api/modules.markdown b/doc/api/modules.markdown
index 7b7ebefcb38..eb3a4905a35 100644
--- a/doc/api/modules.markdown
+++ b/doc/api/modules.markdown
@@ -82,11 +82,32 @@ then `require('./foo/bar')` would load the file at
 entry point to their module, while structuring their package how it
 suits them.
 
+Any folders named `"node_modules"` that exist in the current module path
+will also be appended to the effective require path.  This allows for
+bundling libraries and other dependencies in a 'node_modules' folder at
+the root of a program.
+
+To avoid overly long lookup paths in the case of nested packages,
+the following 2 optimizations are made:
+
+1. If the module calling `require()` is already within a `node_modules`
+   folder, then the lookup will not go above the top-most `node_modules`
+   directory.
+2. Node will not append `node_modules` to a path already ending in
+   `node_modules`.
+
+So, for example, if the file at
+`/usr/lib/node_modules/foo/node_modules/bar.js` were to do
+`require('baz')`, then the following places would be searched for a
+`baz` module, in this order:
+
+* 1: `/usr/lib/node_modules/foo/node_modules`
+* 2: `/usr/lib/node_modules`
+
 `require.paths` can be modified at runtime by simply unshifting new
 paths onto it, or at startup with the `NODE_PATH` environmental
 variable (which should be a list of paths, colon separated).
 
-
 The second time `require('foo')` is called, it is not loaded again from
 disk. It looks in the `require.cache` object to see if it has been loaded
 before.
diff --git a/lib/module.js b/lib/module.js
index b5724ffaf6e..f94da1d047c 100644
--- a/lib/module.js
+++ b/lib/module.js
@@ -163,6 +163,35 @@ Module._findPath = function(request, paths) {
   return false;
 };
 
+// 'from' is the __dirname of the module.
+Module._nodeModulePaths = function(from) {
+  // guarantee that 'from' is absolute.
+  from = path.resolve(from);
+
+  // note: this approach *only* works when the path is guaranteed
+  // to be absolute.  Doing a fully-edge-case-correct path.split
+  // that works on both Windows and Posix is non-trivial.
+  var splitRe = process.platform === 'win32' ? /[\/\\]/ : /\//;
+  // yes, '/' works on both, but let's be a little canonical.
+  var joiner = process.platform === 'win32' ? '\\' : '/';
+  var paths = [];
+  var parts = from.split(splitRe);
+
+  var root = parts.indexOf('node_modules') - 1;
+  if (root < 0) root = 0;
+
+  var tip = parts.length - 1;
+
+  for (var tip = parts.length - 1; tip >= root; tip --) {
+    // don't search in .../node_modules/node_modules
+    if (parts[tip] === 'node_modules') continue;
+    var dir = parts.slice(0, tip + 1).concat('node_modules').join(joiner);
+    paths.push(dir);
+  }
+
+  return paths;
+}
+
 
 Module._resolveLookupPaths = function(request, parent) {
   if (NativeModule.exists(request)) {
@@ -171,14 +200,18 @@ Module._resolveLookupPaths = function(request, parent) {
 
   var start = request.substring(0, 2);
   if (start !== './' && start !== '..') {
-    return [request, Module._paths];
+    var paths = Module._paths;
+    if (parent) paths = paths.concat(parent.paths);
+    return [request, paths];
   }
 
   // with --eval, parent.id is not set and parent.filename is null
   if (!parent || !parent.id || !parent.filename) {
     // make require('./path/to/foo') work - normally the path is taken
     // from realpath(__filename) but with eval there is no filename
-    return [request, ['.'].concat(Module._paths)];
+    var mainPaths = ['.'].concat(Module._paths);
+    mainPaths = mainPaths.concat(Module._nodeModulePaths('.'));
+    return [request, mainPaths];
   }
 
   // Is the parent an index module?
@@ -268,6 +301,7 @@ Module.prototype.load = function(filename) {
 
   assert(!this.loaded);
   this.filename = filename;
+  this.paths = Module._nodeModulePaths(path.dirname(filename));
 
   var extension = path.extname(filename) || '.js';
   if (!Module._extensions[extension]) extension = '.js';
diff --git a/test/fixtures/node_modules/asdf.js b/test/fixtures/node_modules/asdf.js
new file mode 100644
index 00000000000..67e2ea21ed4
--- /dev/null
+++ b/test/fixtures/node_modules/asdf.js
@@ -0,0 +1,3 @@
+console.error(__filename);
+console.error(module.paths.join('\n')+'\n');
+throw new Error('Should not ever get here.');
diff --git a/test/fixtures/node_modules/bar.js b/test/fixtures/node_modules/bar.js
new file mode 100644
index 00000000000..0a9ce329c56
--- /dev/null
+++ b/test/fixtures/node_modules/bar.js
@@ -0,0 +1,2 @@
+console.error(__filename);
+console.error(module.paths.join('\n')+'\n');
diff --git a/test/fixtures/node_modules/baz/index.js b/test/fixtures/node_modules/baz/index.js
new file mode 100644
index 00000000000..be18439e616
--- /dev/null
+++ b/test/fixtures/node_modules/baz/index.js
@@ -0,0 +1,13 @@
+console.error(__filename);
+console.error(module.paths.join('\n')+'\n');
+// this should work, and get the one that doesn't throw
+require('bar');
+
+// since this is inside a node_modules folder,
+// it should be impossible to ever see /node_modules in the
+// lookup paths, since it's rooted on the uppermost node_modules
+// directory.
+require('assert').equal(-1, module.paths.indexOf('/node_modules'));
+
+// this should work, and get the one in ./node_modules/asdf.js
+require('asdf');
diff --git a/test/fixtures/node_modules/baz/node_modules/asdf.js b/test/fixtures/node_modules/baz/node_modules/asdf.js
new file mode 100644
index 00000000000..0a9ce329c56
--- /dev/null
+++ b/test/fixtures/node_modules/baz/node_modules/asdf.js
@@ -0,0 +1,2 @@
+console.error(__filename);
+console.error(module.paths.join('\n')+'\n');
diff --git a/test/fixtures/node_modules/foo.js b/test/fixtures/node_modules/foo.js
new file mode 100644
index 00000000000..90ab0f3609a
--- /dev/null
+++ b/test/fixtures/node_modules/foo.js
@@ -0,0 +1,3 @@
+console.error(__filename);
+console.error(module.paths.join('\n')+'\n');
+require('baz');
diff --git a/test/fixtures/node_modules/node_modules/bar.js b/test/fixtures/node_modules/node_modules/bar.js
new file mode 100644
index 00000000000..67e2ea21ed4
--- /dev/null
+++ b/test/fixtures/node_modules/node_modules/bar.js
@@ -0,0 +1,3 @@
+console.error(__filename);
+console.error(module.paths.join('\n')+'\n');
+throw new Error('Should not ever get here.');
diff --git a/test/simple/test-module-loading.js b/test/simple/test-module-loading.js
index fc1e63b8d2c..12f685ecd23 100644
--- a/test/simple/test-module-loading.js
+++ b/test/simple/test-module-loading.js
@@ -77,6 +77,11 @@ var root = require('../fixtures/cycles/root'),
 assert.equal(root.foo, foo);
 assert.equal(root.sayHello(), root.hello);
 
+common.debug('test node_modules folders');
+// asserts are in the fixtures files themselves,
+// since they depend on the folder structure.
+require('../fixtures/node_modules/foo');
+
 common.debug('test name clashes');
 // this one exists and should import the local module
 var my_path = require('./path');