diff --git a/lib/sass/plugin.rb b/lib/sass/plugin.rb
index da2a910d..fd63ebaf 100644
--- a/lib/sass/plugin.rb
+++ b/lib/sass/plugin.rb
@@ -37,9 +37,11 @@ module Sass
       # from <tt>options[:templates]</tt>
       # if it does.
       def update_stylesheets
-        Dir[options[:template_location] + '/*.sass'].each do |file|
-          name = File.basename(file)[0...-5]
+        Dir.glob(File.join(options[:template_location], "**", "*.sass")).entries.each do |file|
           
+          # Get the relative path to the file with no extension
+          name = file.sub(options[:template_location] + "/", "")[0...-5]
+                    
           if options[:always_update] || stylesheet_needs_update?(name)
             css = css_filename(name)
             File.delete(css) if File.exists?(css)
@@ -79,7 +81,12 @@ module Sass
               end
             end
             
-            Dir.mkdir(l_options[:css_location]) unless File.exist?(l_options[:css_location])
+            # Create any directories that might be necessary
+            dirs = [l_options[:css_location]]
+            name.split("/")[0...-1].each { |dir| dirs << "#{dirs[-1]}/#{dir}" }
+            dirs.each { |dir| Dir.mkdir(dir) unless File.exist?(dir) }
+            
+            # Finally, write the file
             File.open(css, 'w') do |file|
               file.print(result)
             end
diff --git a/test/sass/plugin_test.rb b/test/sass/plugin_test.rb
index 5bf7e37c..d58c3572 100644
--- a/test/sass/plugin_test.rb
+++ b/test/sass/plugin_test.rb
@@ -1,16 +1,19 @@
 #!/usr/bin/env ruby
 
-require 'test/unit'
-require File.dirname(__FILE__) + '/../../lib/sass'
-
 RAILS_ENV  = 'testing'
-
+require 'test/unit'
+require 'fileutils'
+require File.dirname(__FILE__) + '/../../lib/sass'
 require 'sass/plugin'
 
 class SassPluginTest < Test::Unit::TestCase
-  @@templates = %w{ complex constants parent_ref import alt }
+  @@templates = %w{
+    complex constants parent_ref import alt
+    subdir/subdir subdir/nested_subdir/nested_subdir
+  }
 
   def setup
+    FileUtils.mkdir File.dirname(__FILE__) + '/tmp'
     Sass::Plugin.options = {
       :template_location => File.dirname(__FILE__) + '/templates',
       :css_location => File.dirname(__FILE__) + '/tmp',
@@ -23,7 +26,7 @@ class SassPluginTest < Test::Unit::TestCase
   end
   
   def teardown
-    File.delete(*Dir[tempfile_loc('*')])
+    FileUtils.rm_r  File.dirname(__FILE__) + '/tmp'
   end
 
   def test_templates_should_render_correctly
diff --git a/test/sass/results/subdir/nested_subdir/nested_subdir.css b/test/sass/results/subdir/nested_subdir/nested_subdir.css
new file mode 100644
index 00000000..7aadcfe6
--- /dev/null
+++ b/test/sass/results/subdir/nested_subdir/nested_subdir.css
@@ -0,0 +1 @@
+#pi { width: 314px; }
\ No newline at end of file
diff --git a/test/sass/results/subdir/subdir.css b/test/sass/results/subdir/subdir.css
new file mode 100644
index 00000000..25c5c19b
--- /dev/null
+++ b/test/sass/results/subdir/subdir.css
@@ -0,0 +1 @@
+#subdir { font-size: 20px; font-weight: bold; }
\ No newline at end of file
diff --git a/test/sass/templates/subdir/nested_subdir/nested_subdir.sass b/test/sass/templates/subdir/nested_subdir/nested_subdir.sass
new file mode 100644
index 00000000..aae9eebf
--- /dev/null
+++ b/test/sass/templates/subdir/nested_subdir/nested_subdir.sass
@@ -0,0 +1,3 @@
+#pi
+  :width 314px
+    
\ No newline at end of file
diff --git a/test/sass/templates/subdir/subdir.sass b/test/sass/templates/subdir/subdir.sass
new file mode 100644
index 00000000..bbe9810f
--- /dev/null
+++ b/test/sass/templates/subdir/subdir.sass
@@ -0,0 +1,6 @@
+#subdir
+  :font
+    :size 20px
+    :weight bold
+    
+    
\ No newline at end of file