diff --git a/build/lib/compilation.js b/build/lib/compilation.js
index a2de56aa0ce..14c777078c4 100644
--- a/build/lib/compilation.js
+++ b/build/lib/compilation.js
@@ -11,11 +11,13 @@ const bom = require("gulp-bom");
 const sourcemaps = require("gulp-sourcemaps");
 const tsb = require("gulp-tsb");
 const path = require("path");
+const ts = require("typescript");
 const _ = require("underscore");
 const monacodts = require("../monaco/api");
 const nls = require("./nls");
 const reporter_1 = require("./reporter");
 const util = require("./util");
+const util2 = require("gulp-util");
 const watch = require('./watch');
 const reporter = reporter_1.createReporter();
 function getTypeScriptCompilerOptions(src) {
@@ -79,14 +81,15 @@ function compileTask(src, out, build) {
     return function () {
         const compile = createCompile(src, build, true);
         const srcPipe = es.merge(gulp.src(`${src}/**`, { base: `${src}` }), gulp.src(typesDts));
-        // Do not write .d.ts files to disk, as they are not needed there.
-        const dtsFilter = util.filter(data => !/\.d\.ts$/.test(data.path));
+        let generator = new MonacoGenerator(false);
+        if (src === 'src') {
+            generator.execute();
+        }
         return srcPipe
+            .pipe(generator.stream)
             .pipe(compile())
-            .pipe(dtsFilter)
-            .pipe(gulp.dest(out))
-            .pipe(dtsFilter.restore)
-            .pipe(src !== 'src' ? es.through() : monacodtsTask(out, false));
+            .pipe(gulp.dest(out));
+        // .pipe(src !== 'src' ? es.through() : monacodtsTask(out, false));
     };
 }
 exports.compileTask = compileTask;
@@ -95,67 +98,116 @@ function watchTask(out, build) {
         const compile = createCompile('src', build);
         const src = es.merge(gulp.src('src/**', { base: 'src' }), gulp.src(typesDts));
         const watchSrc = watch('src/**', { base: 'src' });
-        // Do not write .d.ts files to disk, as they are not needed there.
-        const dtsFilter = util.filter(data => !/\.d\.ts$/.test(data.path));
+        let generator = new MonacoGenerator(true);
+        generator.execute();
         return watchSrc
+            .pipe(generator.stream)
             .pipe(util.incremental(compile, src, true))
-            .pipe(dtsFilter)
-            .pipe(gulp.dest(out))
-            .pipe(dtsFilter.restore)
-            .pipe(monacodtsTask(out, true));
+            .pipe(gulp.dest(out));
     };
 }
 exports.watchTask = watchTask;
-function monacodtsTask(out, isWatch) {
-    const basePath = path.resolve(process.cwd(), out);
-    const neededFiles = {};
-    monacodts.getFilesToWatch(out).forEach(function (filePath) {
-        filePath = path.normalize(filePath);
-        neededFiles[filePath] = true;
-    });
-    const inputFiles = {};
-    for (const filePath in neededFiles) {
-        if (/\bsrc(\/|\\)vs\b/.test(filePath)) {
-            // This file is needed from source => simply read it now
-            inputFiles[filePath] = fs.readFileSync(filePath).toString();
-        }
-    }
-    const setInputFile = (filePath, contents) => {
-        if (inputFiles[filePath] === contents) {
-            // no change
-            return;
-        }
-        inputFiles[filePath] = contents;
-        const neededInputFilesCount = Object.keys(neededFiles).length;
-        const availableInputFilesCount = Object.keys(inputFiles).length;
-        if (neededInputFilesCount === availableInputFilesCount) {
-            run();
-        }
-    };
-    const run = () => {
-        const result = monacodts.run(out, inputFiles);
-        if (!result.isTheSame) {
-            if (isWatch) {
-                fs.writeFileSync(result.filePath, result.content);
+const REPO_SRC_FOLDER = path.join(__dirname, '../../src');
+class MonacoGenerator {
+    constructor(isWatch) {
+        this._isWatch = isWatch;
+        this.stream = es.through();
+        this._inputFiles = monacodts.getIncludesInRecipe().map((moduleId) => {
+            if (/\.d\.ts$/.test(moduleId)) {
+                // This source file is already in .d.ts form
+                return path.join(REPO_SRC_FOLDER, moduleId);
             }
             else {
-                fs.writeFileSync(result.filePath, result.content);
-                resultStream.emit('error', 'monaco.d.ts is no longer up to date. Please run gulp watch and commit the new file.');
+                return path.join(REPO_SRC_FOLDER, `${moduleId}.ts`);
             }
+        });
+        // Install watchers
+        this._watchers = [];
+        if (this._isWatch) {
+            this._inputFiles.forEach((filePath) => {
+                const watcher = fs.watch(filePath);
+                watcher.addListener('change', () => {
+                    this._inputFileChanged[filePath] = true;
+                    // Avoid hitting empty files... :/
+                    setTimeout(() => this.execute(), 10);
+                });
+                this._watchers.push(watcher);
+            });
+            const recipeWatcher = fs.watch(monacodts.RECIPE_PATH);
+            recipeWatcher.addListener('change', () => {
+                this._recipeFileChanged = true;
+                // Avoid hitting empty files... :/
+                setTimeout(() => this.execute(), 10);
+            });
+            this._watchers.push(recipeWatcher);
         }
-    };
-    let resultStream;
-    if (isWatch) {
-        watch('build/monaco/*').pipe(es.through(function () {
-            run();
-        }));
+        this._inputFileChanged = {};
+        this._inputFiles.forEach(file => this._inputFileChanged[file] = true);
+        this._recipeFileChanged = true;
+        this._dtsFilesContents = {};
     }
-    resultStream = es.through(function (data) {
-        const filePath = path.normalize(path.resolve(basePath, data.relative));
-        if (neededFiles[filePath]) {
-            setInputFile(filePath, data.contents.toString());
+    dispose() {
+        this._watchers.forEach(watcher => watcher.close());
+    }
+    _run() {
+        let somethingChanged = false;
+        const setDTSFileContent = (file, contents) => {
+            if (this._dtsFilesContents[file] === contents) {
+                return;
+            }
+            this._dtsFilesContents[file] = contents;
+            somethingChanged = true;
+        };
+        const fileMap = {};
+        this._inputFiles.forEach((inputFile) => {
+            if (!this._inputFileChanged[inputFile]) {
+                return;
+            }
+            this._inputFileChanged[inputFile] = false;
+            const inputFileContents = fs.readFileSync(inputFile).toString();
+            if (/\.d\.ts$/.test(inputFile)) {
+                // This is a .d.ts file
+                setDTSFileContent(inputFile, inputFileContents);
+                return;
+            }
+            fileMap[inputFile] = inputFileContents;
+        });
+        if (Object.keys(fileMap).length > 0) {
+            const service = ts.createLanguageService(new monacodts.TypeScriptLanguageServiceHost({}, fileMap, {}));
+            Object.keys(fileMap).forEach((fileName) => {
+                const output = service.getEmitOutput(fileName, true).outputFiles[0].text;
+                const destFileName = fileName.replace(/\.ts$/, '.d.ts');
+                setDTSFileContent(destFileName, output);
+            });
         }
-        this.emit('data', data);
-    });
-    return resultStream;
+        if (this._recipeFileChanged) {
+            this._recipeFileChanged = false;
+            somethingChanged = true;
+        }
+        if (!somethingChanged) {
+            // Nothing changed
+            return null;
+        }
+        return monacodts.run('src', this._dtsFilesContents);
+    }
+    _log(message, ...rest) {
+        util2.log(util2.colors.cyan('[monaco.d.ts]'), message, ...rest);
+    }
+    execute() {
+        const startTime = Date.now();
+        const result = this._run();
+        if (!result) {
+            // nothing really changed
+            return;
+        }
+        if (result.isTheSame) {
+            this._log(`monaco.d.ts is unchanged - total time took ${Date.now() - startTime} ms`);
+            return;
+        }
+        fs.writeFileSync(result.filePath, result.content);
+        this._log(`monaco.d.ts is changed - total time took ${Date.now() - startTime} ms`);
+        if (!this._isWatch) {
+            this.stream.emit('error', 'monaco.d.ts is no longer up to date. Please run gulp watch and commit the new file.');
+        }
+    }
 }
diff --git a/build/lib/compilation.ts b/build/lib/compilation.ts
index 725e36a92eb..78fb02c7cbb 100644
--- a/build/lib/compilation.ts
+++ b/build/lib/compilation.ts
@@ -12,11 +12,13 @@ import * as bom from 'gulp-bom';
 import * as sourcemaps from 'gulp-sourcemaps';
 import * as tsb from 'gulp-tsb';
 import * as path from 'path';
+import * as ts from 'typescript';
 import * as _ from 'underscore';
 import * as monacodts from '../monaco/api';
 import * as nls from './nls';
 import { createReporter } from './reporter';
 import * as util from './util';
+import * as util2 from 'gulp-util';
 const watch = require('./watch');
 
 const reporter = createReporter();
@@ -95,15 +97,16 @@ export function compileTask(src: string, out: string, build: boolean): () => Nod
 			gulp.src(typesDts),
 		);
 
-		// Do not write .d.ts files to disk, as they are not needed there.
-		const dtsFilter = util.filter(data => !/\.d\.ts$/.test(data.path));
+		let generator = new MonacoGenerator(false);
+		if (src === 'src') {
+			generator.execute();
+		}
 
 		return srcPipe
+			.pipe(generator.stream)
 			.pipe(compile())
-			.pipe(dtsFilter)
-			.pipe(gulp.dest(out))
-			.pipe(dtsFilter.restore)
-			.pipe(src !== 'src' ? es.through() : monacodtsTask(out, false));
+			.pipe(gulp.dest(out));
+			// .pipe(src !== 'src' ? es.through() : monacodtsTask(out, false));
 	};
 }
 
@@ -118,76 +121,148 @@ export function watchTask(out: string, build: boolean): () => NodeJS.ReadWriteSt
 		);
 		const watchSrc = watch('src/**', { base: 'src' });
 
-		// Do not write .d.ts files to disk, as they are not needed there.
-		const dtsFilter = util.filter(data => !/\.d\.ts$/.test(data.path));
+		let generator = new MonacoGenerator(true);
+		generator.execute();
 
 		return watchSrc
+			.pipe(generator.stream)
 			.pipe(util.incremental(compile, src, true))
-			.pipe(dtsFilter)
-			.pipe(gulp.dest(out))
-			.pipe(dtsFilter.restore)
-			.pipe(monacodtsTask(out, true));
+			.pipe(gulp.dest(out));
 	};
 }
 
-function monacodtsTask(out: string, isWatch: boolean): NodeJS.ReadWriteStream {
+const REPO_SRC_FOLDER = path.join(__dirname, '../../src');
 
-	const basePath = path.resolve(process.cwd(), out);
+class MonacoGenerator {
+	private readonly _isWatch: boolean;
+	public readonly stream: NodeJS.ReadWriteStream;
+	/**
+	 * This list is never changed for the lifetime of this object.
+	 */
+	private readonly _inputFiles: string[];
+	private readonly _watchers: fs.FSWatcher[];
 
-	const neededFiles: { [file: string]: boolean; } = {};
-	monacodts.getFilesToWatch(out).forEach(function (filePath) {
-		filePath = path.normalize(filePath);
-		neededFiles[filePath] = true;
-	});
+	private _inputFileChanged: { [filePath: string]: boolean; };
+	private _recipeFileChanged: boolean;
 
-	const inputFiles: { [file: string]: string; } = {};
-	for (const filePath in neededFiles) {
-		if (/\bsrc(\/|\\)vs\b/.test(filePath)) {
-			// This file is needed from source => simply read it now
-			inputFiles[filePath] = fs.readFileSync(filePath).toString();
+	private _dtsFilesContents: { [filePath: string]: string; };
+
+	constructor(isWatch: boolean) {
+		this._isWatch = isWatch;
+		this.stream = es.through();
+		this._inputFiles = monacodts.getIncludesInRecipe().map((moduleId) => {
+			if (/\.d\.ts$/.test(moduleId)) {
+				// This source file is already in .d.ts form
+				return path.join(REPO_SRC_FOLDER, moduleId);
+			} else {
+				return path.join(REPO_SRC_FOLDER, `${moduleId}.ts`);
+			}
+		});
+
+		// Install watchers
+		this._watchers = [];
+		if (this._isWatch) {
+			this._inputFiles.forEach((filePath) => {
+				const watcher = fs.watch(filePath);
+				watcher.addListener('change', () => {
+					this._inputFileChanged[filePath] = true;
+					// Avoid hitting empty files... :/
+					setTimeout(() => this.execute(), 10);
+				});
+				this._watchers.push(watcher);
+			});
+
+			const recipeWatcher = fs.watch(monacodts.RECIPE_PATH);
+			recipeWatcher.addListener('change', () => {
+				this._recipeFileChanged = true;
+				// Avoid hitting empty files... :/
+				setTimeout(() => this.execute(), 10);
+			});
+			this._watchers.push(recipeWatcher);
 		}
+
+		this._inputFileChanged = {};
+		this._inputFiles.forEach(file => this._inputFileChanged[file] = true);
+		this._recipeFileChanged = true;
+		this._dtsFilesContents = {};
 	}
 
-	const setInputFile = (filePath: string, contents: string) => {
-		if (inputFiles[filePath] === contents) {
-			// no change
+	public dispose(): void {
+		this._watchers.forEach(watcher => watcher.close());
+	}
+
+	private _run(): monacodts.IMonacoDeclarationResult | null {
+		let somethingChanged = false;
+
+		const setDTSFileContent = (file: string, contents: string): void => {
+			if (this._dtsFilesContents[file] === contents) {
+				return;
+			}
+			this._dtsFilesContents[file] = contents;
+			somethingChanged = true;
+		};
+
+		const fileMap: { [fileName: string]: string; } = {};
+
+		this._inputFiles.forEach((inputFile) => {
+			if (!this._inputFileChanged[inputFile]) {
+				return;
+			}
+			this._inputFileChanged[inputFile] = false;
+
+			const inputFileContents = fs.readFileSync(inputFile).toString();
+			if (/\.d\.ts$/.test(inputFile)) {
+				// This is a .d.ts file
+				setDTSFileContent(inputFile, inputFileContents);
+				return;
+			}
+
+			fileMap[inputFile] = inputFileContents;
+		});
+
+		if (Object.keys(fileMap).length > 0) {
+			const service = ts.createLanguageService(new monacodts.TypeScriptLanguageServiceHost({}, fileMap, {}));
+
+			Object.keys(fileMap).forEach((fileName) => {
+				const output = service.getEmitOutput(fileName, true).outputFiles[0].text;
+				const destFileName = fileName.replace(/\.ts$/, '.d.ts');
+				setDTSFileContent(destFileName, output);
+			});
+		}
+
+		if (this._recipeFileChanged) {
+			this._recipeFileChanged = false;
+			somethingChanged = true;
+		}
+
+		if (!somethingChanged) {
+			// Nothing changed
+			return null;
+		}
+
+		return monacodts.run('src', this._dtsFilesContents);
+	}
+
+	private _log(message: any, ...rest: any[]): void {
+		util2.log(util2.colors.cyan('[monaco.d.ts]'), message, ...rest);
+	}
+
+	public execute(): void {
+		const startTime = Date.now();
+		const result = this._run();
+		if (!result) {
+			// nothing really changed
 			return;
 		}
-		inputFiles[filePath] = contents;
-		const neededInputFilesCount = Object.keys(neededFiles).length;
-		const availableInputFilesCount = Object.keys(inputFiles).length;
-		if (neededInputFilesCount === availableInputFilesCount) {
-			run();
+		if (result.isTheSame) {
+			this._log(`monaco.d.ts is unchanged - total time took ${Date.now() - startTime} ms`);
+			return;
 		}
-	};
 
-	const run = () => {
-		const result = monacodts.run(out, inputFiles);
-		if (!result.isTheSame) {
-			if (isWatch) {
-				fs.writeFileSync(result.filePath, result.content);
-			} else {
-				fs.writeFileSync(result.filePath, result.content);
-				resultStream.emit('error', 'monaco.d.ts is no longer up to date. Please run gulp watch and commit the new file.');
-			}
+		fs.writeFileSync(result.filePath, result.content);
+		this._log(`monaco.d.ts is changed - total time took ${Date.now() - startTime} ms`);
+		if (!this._isWatch) {
+			this.stream.emit('error', 'monaco.d.ts is no longer up to date. Please run gulp watch and commit the new file.');
 		}
-	};
-
-	let resultStream: NodeJS.ReadWriteStream;
-
-	if (isWatch) {
-		watch('build/monaco/*').pipe(es.through(function () {
-			run();
-		}));
 	}
-
-	resultStream = es.through(function (data) {
-		const filePath = path.normalize(path.resolve(basePath, data.relative));
-		if (neededFiles[filePath]) {
-			setInputFile(filePath, data.contents.toString());
-		}
-		this.emit('data', data);
-	});
-
-	return resultStream;
 }
diff --git a/build/monaco/api.js b/build/monaco/api.js
index ec041b12c0b..e1fa18442f2 100644
--- a/build/monaco/api.js
+++ b/build/monaco/api.js
@@ -14,7 +14,7 @@ function log(message, ...rest) {
 }
 const SRC = path.join(__dirname, '../../src');
 const OUT_ROOT = path.join(__dirname, '../../');
-const RECIPE_PATH = path.join(__dirname, './monaco.d.ts.recipe');
+exports.RECIPE_PATH = path.join(__dirname, './monaco.d.ts.recipe');
 const DECLARATION_PATH = path.join(__dirname, '../../src/vs/monaco.d.ts');
 var CURRENT_PROCESSING_RULE = '';
 function logErr(message, ...rest) {
@@ -314,7 +314,7 @@ function generateDeclarationFile(out, inputFiles, recipe) {
     ];
 }
 function getIncludesInRecipe() {
-    let recipe = fs.readFileSync(RECIPE_PATH).toString();
+    let recipe = fs.readFileSync(exports.RECIPE_PATH).toString();
     let lines = recipe.split(/\r\n|\n|\r/);
     let result = [];
     lines.forEach(line => {
@@ -333,6 +333,7 @@ function getIncludesInRecipe() {
     });
     return result;
 }
+exports.getIncludesInRecipe = getIncludesInRecipe;
 function getFilesToWatch(out) {
     return getIncludesInRecipe().map((moduleId) => moduleIdToPath(out, moduleId));
 }
@@ -340,7 +341,7 @@ exports.getFilesToWatch = getFilesToWatch;
 function run(out, inputFiles) {
     log('Starting monaco.d.ts generation');
     SOURCE_FILE_MAP = {};
-    let recipe = fs.readFileSync(RECIPE_PATH).toString();
+    let recipe = fs.readFileSync(exports.RECIPE_PATH).toString();
     let [result, usageContent] = generateDeclarationFile(out, inputFiles, recipe);
     let currentContent = fs.readFileSync(DECLARATION_PATH).toString();
     log('Finished monaco.d.ts generation');
@@ -404,6 +405,7 @@ class TypeScriptLanguageServiceHost {
         return fileName === this.getDefaultLibFileName(this._compilerOptions);
     }
 }
+exports.TypeScriptLanguageServiceHost = TypeScriptLanguageServiceHost;
 function execute() {
     const OUTPUT_FILES = {};
     const SRC_FILES = {};
diff --git a/build/monaco/api.ts b/build/monaco/api.ts
index ec30cc00c48..8e7eead0590 100644
--- a/build/monaco/api.ts
+++ b/build/monaco/api.ts
@@ -16,7 +16,7 @@ function log(message: any, ...rest: any[]): void {
 
 const SRC = path.join(__dirname, '../../src');
 const OUT_ROOT = path.join(__dirname, '../../');
-const RECIPE_PATH = path.join(__dirname, './monaco.d.ts.recipe');
+export const RECIPE_PATH = path.join(__dirname, './monaco.d.ts.recipe');
 const DECLARATION_PATH = path.join(__dirname, '../../src/vs/monaco.d.ts');
 
 var CURRENT_PROCESSING_RULE = '';
@@ -375,7 +375,7 @@ function generateDeclarationFile(out: string, inputFiles: { [file: string]: stri
 	];
 }
 
-function getIncludesInRecipe(): string[] {
+export function getIncludesInRecipe(): string[] {
 	let recipe = fs.readFileSync(RECIPE_PATH).toString();
 	let lines = recipe.split(/\r\n|\n|\r/);
 	let result: string[] = [];
@@ -442,7 +442,7 @@ export function complainErrors() {
 interface ILibMap { [libName: string]: string; }
 interface IFileMap { [fileName: string]: string; }
 
-class TypeScriptLanguageServiceHost implements ts.LanguageServiceHost {
+export class TypeScriptLanguageServiceHost implements ts.LanguageServiceHost {
 
 	private readonly _libs: ILibMap;
 	private readonly _files: IFileMap;
diff --git a/src/tsconfig.json b/src/tsconfig.json
index 6f552e5ca05..4b9f4170455 100644
--- a/src/tsconfig.json
+++ b/src/tsconfig.json
@@ -4,7 +4,6 @@
 		"removeComments": false,
 		"preserveConstEnums": true,
 		"sourceMap": false,
-		"declaration": true,
 		"outDir": "../out"
 	},
 	"include": [