diff --git a/data/default.nix b/data/default.nix
index 136cfaf..50cf00b 100644
--- a/data/default.nix
+++ b/data/default.nix
@@ -1,51 +1,69 @@
 { nixpkgs ? <nixpkgs>
 , config ? {}
 }:
-
 with (import nixpkgs config);
-
 let
   mkDerivation =
-    { srcs ? ./elm-srcs.nix
-    , src
+    { elmsrcs ? ./elm-srcs.nix
+    , srcs
+    , srcdir ? "src"
     , name
-    , srcdir ? "./src"
     , targets ? []
     , versionsDat ? ./versions.dat
     , outputJavaScript ? false
     }:
-    stdenv.mkDerivation {
-      inherit name src;
+    let sanitizePath = str:
+        let path = builtins.filter (p: p != "..") (lib.splitString "/" str);
+        in lib.concatStringsSep "/" (map (p: if p == "." then srcdir else p) path);
+    in stdenv.mkDerivation {
+      inherit name srcs;
+      sourceRoot = ".";
 
       buildInputs = [ elmPackages.elm ]
         ++ lib.optional outputJavaScript nodePackages_10_x.uglify-js;
 
+      patchPhase = let
+        elmjson = let json = (lib.importJSON ./elm.json) // { source-directories = map sanitizePath srcs; };
+        in writeText "elm.json" (builtins.toJSON json);
+      in ''
+        echo "Generating elm.json"
+        cp \${elmjson} ./elm.json
+        cat elm.json
+      '';
+
       buildPhase = pkgs.elmPackages.fetchElmDeps {
-        elmPackages = import srcs;
+        elmPackages = import elmsrcs;
         inherit versionsDat;
       };
 
-      installPhase = let
-        elmfile = module: "\${srcdir}/\${builtins.replaceStrings ["."] ["/"] module}.elm";
-        extension = if outputJavaScript then "js" else "html";
+      installPhase =
+        let extension = if outputJavaScript then "js" else "html";
       in ''
         mkdir -p \$out/share/doc
-        \${lib.concatStrings (map (module: ''
-          echo "compiling \${elmfile module}"
-          elm make \${elmfile module} --output \$out/\${module}.\${extension} --docs \$out/share/doc/\${module}.json
+        \${lib.concatStrings (map (module:
+          let fullmodule = sanitizePath module;
+              modulename = sanitizePath (lib.removePrefix "./" module);
+          in ''
+          echo "compiling \${modulename}"
+          elm make \${fullmodule}.elm --output \$out/\${modulename}.\${extension} --docs \$out/share/doc/\${modulename}.json
           \${lib.optionalString outputJavaScript ''
-            echo "minifying \${elmfile module}"
-            uglifyjs $out/\${module}.\${extension} --compress 'pure_funcs="F2,F3,F4,F5,F6,F7,F8,F9,A2,A3,A4,A5,A6,A7,A8,A9",pure_getters,keep_fargs=false,unsafe_comps,unsafe' \\
-                | uglifyjs --mangle --output=$out/\${module}.min.\${extension}
+            echo "minifying \${modulename}"
+            uglifyjs $out/\${modulename}.\${extension} --compress 'pure_funcs="F2,F3,F4,F5,F6,F7,F8,F9,A2,A3,A4,A5,A6,A7,A8,A9",pure_getters,keep_fargs=false,unsafe_comps,unsafe' \\
+                | uglifyjs --mangle --output=$out/\${modulename}.min.\${extension}
           ''}
         '') targets)}
       '';
     };
 in mkDerivation {
   name = "${name}";
-  srcs = ./elm-srcs.nix;
-  src = ./.;
-  targets = ["Main"];
+  elmsrcs = ./elm-srcs.nix;
+  srcs = ${srcs};
+  # Generated by elm2nix
+  # should be *name* of current directory is used to find sources
   srcdir = "${srcdir}";
+  # Please configure this line
+  # Should be relative path as a string to modules you want to compile
+  # excluding `.elm` extension
+  targets = ["./Main"];
   outputJavaScript = false;
 }
diff --git a/elm2nix.cabal b/elm2nix.cabal
index 23d2b36..3ee0294 100644
--- a/elm2nix.cabal
+++ b/elm2nix.cabal
@@ -45,6 +45,8 @@ library
     , text
     , transformers
     , unordered-containers
+    , vector
+    , directory
   exposed-modules:
       Elm2Nix
       Elm2Nix.FixedOutput
@@ -72,14 +74,3 @@ executable elm2nix
     , here
     , ansi-wl-pprint
   default-language: Haskell2010
-
-test-suite elm2nix-test
-  type: exitcode-stdio-1.0
-  main-is: Spec.hs
-  hs-source-dirs:
-      test
-  ghc-options: -threaded -rtsopts -with-rtsopts=-N
-  build-depends:
-      base >= 4.7 && < 5
-    , elm2nix
-  default-language: Haskell2010
diff --git a/scripts/tests.sh b/scripts/tests.sh
index 26e49b4..232d7cb 100755
--- a/scripts/tests.sh
+++ b/scripts/tests.sh
@@ -27,3 +27,11 @@ pushd $MYTMPDIR/elm-todomvc
   nix-build
   checkfile ./result/Main.html
 popd
+
+pushd test/source-directories/a-src
+  elm2nix init > default.nix
+  elm2nix convert > elm-srcs.nix
+  elm2nix snapshot > versions.dat
+  nix-build
+  checkfile ./result/Main.html
+popd
diff --git a/src/Elm2Nix.hs b/src/Elm2Nix.hs
index 964400a..b8dd0de 100644
--- a/src/Elm2Nix.hs
+++ b/src/Elm2Nix.hs
@@ -17,13 +17,16 @@ import Data.List (intercalate)
 import Data.HashMap.Strict (HashMap)
 import Data.String.Here
 import Data.Text (Text)
+import Data.Vector (Vector)
 import System.Exit (exitFailure)
 import System.IO (hPutStrLn, stderr)
 
+import qualified System.Directory
 import qualified Data.HashMap.Strict as HM
 import qualified Data.ByteString.Lazy as LBS
 import qualified Data.Aeson as Json
 import qualified Data.Text as Text
+import qualified Data.Vector as Vector
 
 import Elm2Nix.FixedOutput (FixedDerivation(..), prefetch)
 import Elm2Nix.PackagesSnapshot (snapshot)
@@ -67,13 +70,35 @@ parseElmJsonDeps depsKey obj =
     parseDeps (Object hm) = mapM (uncurry parseDep) (HM.toList hm)
     parseDeps v           = Left (UnexpectedValue v)
 
+tryLookup :: HashMap Text Value -> Text -> Either Elm2NixError Value
+tryLookup hm key = maybeToRight (KeyNotFound key) (HM.lookup key hm)
+  where
     maybeToRight :: b -> Maybe a -> Either b a
     maybeToRight _ (Just x) = Right x
     maybeToRight y Nothing  = Left y
 
-    tryLookup :: HashMap Text Value -> Text -> Either Elm2NixError Value
-    tryLookup hm key =
-      maybeToRight (KeyNotFound key) (HM.lookup key hm)
+parseElmJsonSrcs :: Value -> Either Elm2NixError (Vector FilePath)
+parseElmJsonSrcs obj =
+  case obj of
+    Object hm -> do
+      case tryLookup hm "source-directories" of
+          Left _            -> Right Vector.empty
+          Right (Array vec) -> mapM extractSrcPath vec
+          Right v           -> Left (UnexpectedValue v)
+    v -> Left $ UnexpectedValue v
+  where
+    extractSrcPath :: Value -> Either Elm2NixError String
+    extractSrcPath val =
+      case val of
+          String text -> Right (toNixPath (Text.unpack text))
+          v -> Left (UnexpectedValue v)
+
+    toNixPath :: FilePath -> FilePath
+    toNixPath path =
+      case path of
+          "."       -> "./."
+          p@('.':_) -> p
+          p         -> "./" <> p
 
 -- CMDs
 
@@ -91,20 +116,50 @@ convert = runCLI $ do
   liftIO (putStrLn (generateNixSources sources))
 
 initialize :: IO ()
-initialize = runCLI $
+initialize = runCLI $ do
+  liftIO (hPutStrLn stderr "Resolving elm.json source directories into Nix paths...")
+  res <- liftIO (fmap Json.eitherDecode (LBS.readFile "elm.json"))
+  elmJson <- either (throwErr . ElmJsonReadError) return res
+
+  srcs' <- either throwErr return (parseElmJsonSrcs elmJson)
+  liftIO (hPutStrLn stderr $ "Using source directories:")
+  liftIO (mapM (hPutStrLn stderr) srcs')
+  let srcs = stringifySrcs srcs'
+  srcdir <- liftIO (getSrcDir srcs')
+
   liftIO (putStrLn [template|data/default.nix|])
   where
     -- | Converts Package.Name to Nix friendly name
     baseName :: Text
     baseName = "elm-app"
+
     version :: Text
     version = "0.1.0"
+
     toNixName :: Text -> Text
     toNixName = Text.replace "/" "-"
+
     name :: String
     name = Text.unpack (toNixName baseName <> "-" <> version)
-    srcdir :: String
-    srcdir = "./src" -- TODO: get from elm.json
+
+    getSrcDir :: Vector FilePath -> IO FilePath
+    getSrcDir dirs
+      | Vector.null dirs = pure "./src"
+      | "./." `Vector.elem` dirs || "."  `Vector.elem` dirs =
+          -- Nix creates dir named after current directory if `srcs` contains `./.`
+        lastDir <$> liftIO System.Directory.getCurrentDirectory
+      | otherwise =
+          -- Can't fail as there is case for Vec.null!
+          pure (Vector.head dirs)
+
+    lastDir :: FilePath -> FilePath
+    lastDir = foldl (\path c -> if c == '/' then "" else path <> [c]) ""
+
+    stringifySrcs :: Vector FilePath -> String
+    stringifySrcs xs =
+      "[\n"
+      <> foldr (\i acc -> "    " <> i <> "\n" <> acc) "" xs
+      <> "  ]"
 
 -- Utils
 
diff --git a/test/.gitignore b/test/.gitignore
new file mode 100644
index 0000000..da7980e
--- /dev/null
+++ b/test/.gitignore
@@ -0,0 +1,2 @@
+*.nix
+*.dat
diff --git a/test/Spec.hs b/test/Spec.hs
deleted file mode 100644
index cd4753f..0000000
--- a/test/Spec.hs
+++ /dev/null
@@ -1,2 +0,0 @@
-main :: IO ()
-main = putStrLn "Test suite not yet implemented"
diff --git a/test/source-directories/a-src/Main.elm b/test/source-directories/a-src/Main.elm
new file mode 100644
index 0000000..c0580c6
--- /dev/null
+++ b/test/source-directories/a-src/Main.elm
@@ -0,0 +1,6 @@
+module Main exposing (main)
+
+import Html exposing (..)
+import Text
+
+main = text Text.hello
diff --git a/test/source-directories/a-src/elm.json b/test/source-directories/a-src/elm.json
new file mode 100644
index 0000000..3adbb7a
--- /dev/null
+++ b/test/source-directories/a-src/elm.json
@@ -0,0 +1,25 @@
+{
+    "type": "application",
+    "source-directories": [
+        ".",
+        "../b-src/src"
+    ],
+    "elm-version": "0.19.0",
+    "dependencies": {
+        "direct": {
+            "elm/browser": "1.0.1",
+            "elm/core": "1.0.2",
+            "elm/html": "1.0.0"
+        },
+        "indirect": {
+            "elm/json": "1.1.3",
+            "elm/time": "1.0.0",
+            "elm/url": "1.0.0",
+            "elm/virtual-dom": "1.0.2"
+        }
+    },
+    "test-dependencies": {
+        "direct": {},
+        "indirect": {}
+    }
+}
diff --git a/test/source-directories/b-src/src/Text.elm b/test/source-directories/b-src/src/Text.elm
new file mode 100644
index 0000000..1a39c3f
--- /dev/null
+++ b/test/source-directories/b-src/src/Text.elm
@@ -0,0 +1,3 @@
+module Text exposing (hello)
+
+hello = "Hello world!"