diff --git a/compiler/src/prog8/ast/AST.kt b/compiler/src/prog8/ast/AST.kt
index d7dd90832..f84a06e0d 100644
--- a/compiler/src/prog8/ast/AST.kt
+++ b/compiler/src/prog8/ast/AST.kt
@@ -11,6 +11,7 @@ import prog8.functions.NotConstArgumentException
 import prog8.functions.builtinFunctionReturnType
 import prog8.parser.prog8Parser
 import java.io.File
+import java.nio.file.Path
 import kotlin.math.abs
 import kotlin.math.floor
 
@@ -456,7 +457,8 @@ class BuiltinFunctionStatementPlaceholder(val name: String, override val positio
 class Module(override val name: String,
              override var statements: MutableList<IStatement>,
              override val position: Position,
-             val isLibraryModule: Boolean) : Node, INameScope {
+             val isLibraryModule: Boolean,
+             val importedFrom: Path) : Node, INameScope {
     override lateinit var parent: Node
 
     override fun linkParents(parent: Node) {
@@ -1746,8 +1748,8 @@ class RepeatLoop(var body: AnonymousScope,
 
 /***************** Antlr Extension methods to create AST ****************/
 
-fun prog8Parser.ModuleContext.toAst(name: String, isLibrary: Boolean) : Module =
-        Module(name, modulestatement().asSequence().map { it.toAst() }.toMutableList(), toPosition(), isLibrary)
+fun prog8Parser.ModuleContext.toAst(name: String, isLibrary: Boolean, importedFrom: Path) : Module =
+        Module(name, modulestatement().asSequence().map { it.toAst() }.toMutableList(), toPosition(), isLibrary, importedFrom)
 
 
 private fun ParserRuleContext.toPosition() : Position {
diff --git a/compiler/src/prog8/compiler/Compiler.kt b/compiler/src/prog8/compiler/Compiler.kt
index eba188862..a8da38fcb 100644
--- a/compiler/src/prog8/compiler/Compiler.kt
+++ b/compiler/src/prog8/compiler/Compiler.kt
@@ -11,6 +11,7 @@ import prog8.optimizing.same
 import prog8.parser.tryGetEmbeddedResource
 import prog8.stackvm.Syscall
 import java.io.File
+import java.nio.file.Path
 import java.util.*
 import kotlin.math.abs
 
@@ -148,7 +149,7 @@ class Compiler(private val options: CompilationOptions) {
         println("\nCreating stackVM code...")
 
         val namespace = module.definingScope()
-        val program = IntermediateProgram(module.name, module.loadAddress, heap)
+        val program = IntermediateProgram(module.name, module.loadAddress, heap, module.importedFrom)
 
         val translator = StatementTranslator(program, namespace, heap)
         translator.process(module)
@@ -224,7 +225,7 @@ private class StatementTranslator(private val prog: IntermediateProgram,
                 is Return -> translate(stmt)
                 is Directive -> {
                     when(stmt.directive) {
-                        "%asminclude" -> translateAsmInclude(stmt.args)
+                        "%asminclude" -> translateAsmInclude(stmt.args, prog.importedFrom)
                         "%asmbinary" -> translateAsmBinary(stmt.args)
                         "%breakpoint" -> {
                             prog.line(stmt.position)
@@ -2229,7 +2230,7 @@ private class StatementTranslator(private val prog: IntermediateProgram,
         }
     }
 
-    private fun translateAsmInclude(args: List<DirectiveArg>) {
+    private fun translateAsmInclude(args: List<DirectiveArg>, importedFrom: Path) {
         val scopeprefix = if(args[1].str!!.isNotBlank()) "${args[1].str}\t.proc\n" else ""
         val scopeprefixEnd = if(args[1].str!!.isNotBlank()) "\t.pend\n" else ""
         val filename=args[0].str!!
@@ -2238,15 +2239,19 @@ private class StatementTranslator(private val prog: IntermediateProgram,
                     val resource = tryGetEmbeddedResource(filename.substring(8)) ?: throw IllegalArgumentException("library file '$filename' not found")
                     resource.bufferedReader().use { it.readText() }
                 } else {
-                    // TODO: look in directory of parent source file first
-                    File(filename).readText()
+                    // first try in the same folder as where the containing file was imported from
+                    val sib = importedFrom.resolveSibling(filename)
+                    if(sib.toFile().isFile)
+                        sib.toFile().readText()
+                    else
+                        File(filename).readText()
                 }
 
         prog.instr(Opcode.INLINE_ASSEMBLY, callLabel=scopeprefix+sourcecode+scopeprefixEnd)
     }
 
     private fun translateAsmBinary(args: List<DirectiveArg>) {
-        TODO("asmbinary not implemented $args")
+        TODO("asmbinary not implemented yet  $args")
     }
 
 }
diff --git a/compiler/src/prog8/compiler/intermediate/IntermediateProgram.kt b/compiler/src/prog8/compiler/intermediate/IntermediateProgram.kt
index fd08c5749..7acc5fee3 100644
--- a/compiler/src/prog8/compiler/intermediate/IntermediateProgram.kt
+++ b/compiler/src/prog8/compiler/intermediate/IntermediateProgram.kt
@@ -4,9 +4,10 @@ import prog8.ast.*
 import prog8.compiler.CompilerException
 import prog8.compiler.HeapValues
 import java.io.PrintStream
+import java.nio.file.Path
 
 
-class IntermediateProgram(val name: String, var loadAddress: Int, val heap: HeapValues) {
+class IntermediateProgram(val name: String, var loadAddress: Int, val heap: HeapValues, val importedFrom: Path) {
 
     class ProgramBlock(val scopedname: String,
                        val shortname: String,
diff --git a/compiler/src/prog8/parser/ModuleParsing.kt b/compiler/src/prog8/parser/ModuleParsing.kt
index 35b6aad8f..362c2ff90 100644
--- a/compiler/src/prog8/parser/ModuleParsing.kt
+++ b/compiler/src/prog8/parser/ModuleParsing.kt
@@ -42,7 +42,7 @@ fun importModule(stream: CharStream, moduleName: String, isLibrary: Boolean): Mo
     // tokens.commentTokens().forEach { println(it) }
 
     // convert to Ast
-    val moduleAst = parseTree.toAst(moduleName, isLibrary)
+    val moduleAst = parseTree.toAst(moduleName, isLibrary, Paths.get(stream.sourceName))
     importedModules[moduleAst.name] = moduleAst
 
     // process imports
diff --git a/examples/test.p8 b/examples/test.p8
index 5af36944e..cf3015cf3 100644
--- a/examples/test.p8
+++ b/examples/test.p8
@@ -30,6 +30,7 @@
         str hoi = "hoi"
         str hoi2 = "hoi2"
 
+
     }