diff --git a/jps/src/org/jetbrains/jps/Module.groovy b/jps/src/org/jetbrains/jps/Module.groovy
index 04efb43da8ea..4a593fb96ec4 100644
--- a/jps/src/org/jetbrains/jps/Module.groovy
+++ b/jps/src/org/jetbrains/jps/Module.groovy
@@ -11,6 +11,7 @@ class Module extends LazyInitializeableObject implements ClasspathItem {//}, Com
   Sdk sdk;
 
   private List<ModuleDependency> dependencies = []
+  List contentRoots = []
   List sourceRoots = []
   List testRoots = []
   List excludes = []
@@ -54,6 +55,10 @@ class Module extends LazyInitializeableObject implements ClasspathItem {//}, Com
         dependencies << new ModuleDependency(new ModuleSourceEntry(module: this), PredefinedDependencyScopes.COMPILE, true)
       }
 
+      meta.content = {Object[] arg ->
+        arg.each { contentRoots << it}
+      }
+
       meta.src = {Object[] arg ->
         arg.each { sourceRoots << it }
       }
diff --git a/jps/src/org/jetbrains/jps/PathUtil.java b/jps/src/org/jetbrains/jps/PathUtil.java
index c4da7b389c17..4c01b3701fb7 100644
--- a/jps/src/org/jetbrains/jps/PathUtil.java
+++ b/jps/src/org/jetbrains/jps/PathUtil.java
@@ -2,6 +2,7 @@ package org.jetbrains.jps;
 
 import java.io.File;
 import java.net.URI;
+import java.util.Set;
 
 /**
  * @author nik
@@ -17,4 +18,15 @@ public class PathUtil {
     }
     return new File(uri).getAbsolutePath();
   }
+
+  public static boolean isUnder(Set<File> ancestors, File file) {
+    File current = file;
+    while (current != null) {
+      if (ancestors.contains(current)) {
+        return true;
+      }
+      current = current.getParentFile();
+    }
+    return false;
+  }
 }
diff --git a/jps/src/org/jetbrains/jps/ProjectBuilder.groovy b/jps/src/org/jetbrains/jps/ProjectBuilder.groovy
index c1ce38c8a523..b7e5fa08461e 100644
--- a/jps/src/org/jetbrains/jps/ProjectBuilder.groovy
+++ b/jps/src/org/jetbrains/jps/ProjectBuilder.groovy
@@ -283,7 +283,7 @@ class ProjectBuilder {
               callback: callback,
               sourceFiles: sourceFiles,
               sourceRoots: chunkSources,
-              excludes: chunk.excludes,
+              excludes: computeExcludes(chunk.elements, chunkSources),
               classpath: chunkClasspath,
               sourceRootsFromModuleWithDependencies: sourceRootsWithDependencies,
       )
@@ -301,7 +301,7 @@ class ProjectBuilder {
                     callback: callback,
                     sourceFiles: sourceFiles,
                     sourceRoots: sourceRoots,
-                    excludes: it.excludes,
+                    excludes: computeExcludes([it], sourceRoots),
                     classpath: chunkClasspath,
                     targetFolder: createOutputFolder(it.name, it, tests),
                     sourceRootsFromModuleWithDependencies: sourceRootsWithDependencies
@@ -362,6 +362,38 @@ class ProjectBuilder {
     }
   }
 
+  private List<String> computeExcludes(Collection<Module> modules, List<String> sourceRoots) {
+    Set<Module> otherModules = new HashSet<Module>(project.modules.values())
+    otherModules.removeAll(modules)
+
+    Set<String> excludes = [] as Set
+    modules.each {Module module ->
+      excludes.addAll(module.excludes)
+    }
+    Set<File> sourceRootFiles = sourceRoots.collect {new File(it)} as Set
+    otherModules.each {Module module ->
+      module.contentRoots.each {
+        if (PathUtil.isUnder(sourceRootFiles, new File(it))) {
+          excludes << it
+        }
+      }
+    }
+
+    return excludes.asList()
+  }
+
+  private Set<String> getContentRootsUnder(Set<String> root, Set<Module> modules) {
+    Set<String> result = [] as Set
+    modules.each {
+      it.contentRoots.each {String contentRoot ->
+        if (PathUtil.isUnder(root, contentRoot)) {
+          result << contentRoot
+        }
+      }
+    }
+    return result
+  }
+
   private String createOutputFolder(String name, Module module, boolean tests) {
     def dst = getProjectPaths().getModuleOutputDir(module, tests)
     if (dst == null) {
diff --git a/jps/src/org/jetbrains/jps/idea/IdeaProjectLoader.groovy b/jps/src/org/jetbrains/jps/idea/IdeaProjectLoader.groovy
index 4d0a4778f40b..71dc85487c78 100644
--- a/jps/src/org/jetbrains/jps/idea/IdeaProjectLoader.groovy
+++ b/jps/src/org/jetbrains/jps/idea/IdeaProjectLoader.groovy
@@ -368,6 +368,10 @@ public class IdeaProjectLoader {
 
         def srcFolderExists = componentTag.content.sourceFolder[0] != null;
 
+        componentTag.content.each {Node contentTag ->
+          content moduleMacroExpander.expandMacros(IdeaProjectLoadingUtil.pathFromUrl(contentTag.@url))
+        }
+
         componentTag.content.sourceFolder.each {Node folderTag ->
           String path = moduleMacroExpander.expandMacros(IdeaProjectLoadingUtil.pathFromUrl(folderTag.@url))
           String prefix = folderTag.@packagePrefix
diff --git a/jps/testSrc/org/jetbrains/jps/OverlappingSourceRootsTest.groovy b/jps/testSrc/org/jetbrains/jps/OverlappingSourceRootsTest.groovy
new file mode 100644
index 000000000000..767fcc291c15
--- /dev/null
+++ b/jps/testSrc/org/jetbrains/jps/OverlappingSourceRootsTest.groovy
@@ -0,0 +1,24 @@
+package org.jetbrains.jps
+
+/**
+ * @author nik
+ */
+public class OverlappingSourceRootsTest extends JpsBuildTestCase {
+  public void test() throws Exception {
+    doTest("testData/overlappingSourceRoots/overlappingSourceRoots.ipr", {}, {
+        dir("production") {
+          dir("inner") {
+            dir("y") {
+              file("a.properties")
+              file("Class2.class")
+            }
+          }
+          dir("overlappingSourceRoots") {
+            dir("x") {
+              file("MyClass.class")
+            }
+          }
+        }
+    })
+  }
+}