diff --git a/v2/build/generators.jam b/v2/build/generators.jam
index 66588a715..c19651f8b 100644
--- a/v2/build/generators.jam
+++ b/v2/build/generators.jam
@@ -105,6 +105,7 @@ class generator
     import virtual-target ;
     import "class" : new ;
     import property ;
+    import path ;
    
     EXPORT class@generator : indent increase-indent decrease-indent generators.dout ;
     
@@ -414,8 +415,20 @@ class generator
                 }
             }
 
-            # Names of sources might include directory. We should strip it.
-            name = $(name:D=) ;
+            # See if we need to add directory to the target name.
+            local dir = [ $(sources[1]).name ] ;            
+            dir = $(dir:D) ;
+            if $(dir) && 
+              # Never append '..' to target path.
+              ! [ MATCH .*(\\.\\.).* : $(dir) ] 
+                && 
+              ! [ path.is-rooted $(dir) ]
+            {
+                # Relative path is always relative to the source
+                # directory. Retain it, so that users can have files
+                # with the same in two different subdirectories.
+                name = $(dir)/$(name) ;                
+            }            
         }
         
         # Assign an action for each target