diff --git a/.appveyor.yml b/.appveyor.yml
index adbcfac556..f946aa5c00 100644
--- a/.appveyor.yml
+++ b/.appveyor.yml
@@ -2,7 +2,7 @@ version: '{build}.{branch}'
 
 skip_branch_with_pr: true
 
-clone_folder: c:\deno
+clone_folder: C:\deno
 clone_depth: 1
 
 environment:
@@ -283,8 +283,8 @@ install:
       # Add binary dir for `pip --user` packages.
       $p += "$env:APPDATA\Python\Scripts"
       # Add python27-x64.
-      $p += "c:\Python27-x64"
-      $p += "c:\Python27-x64\Scripts"
+      $p += "C:\Python27-x64"
+      $p += "C:\Python27-x64\Scripts"
       $env:PATH = $p -join ";"
 
   # Pip on Appveyor is too old. Install a recent version in our user dir.
diff --git a/README.md b/README.md
index a953c76010..1d57d9ce1d 100644
--- a/README.md
+++ b/README.md
@@ -152,7 +152,7 @@ Other useful commands:
     ./third_party/depot_tools/gn desc out/debug/ :deno
     ./third_party/depot_tools/gn help
 
-Env vars: `DENO_BUILD_MODE`, `DENO_BUILD_PATH`, `DENO_BUILD_ARGS`.
+Env vars: `DENO_BUILD_MODE`, `DENO_BUILD_PATH`, `DENO_BUILD_ARGS`, `DENO_DIR`.
 
 ## Contributing
 
diff --git a/src/flags.rs b/src/flags.rs
index e4e3c28dfe..d766fee0c5 100644
--- a/src/flags.rs
+++ b/src/flags.rs
@@ -60,7 +60,10 @@ pub fn print_usage() {
 -h or --help       Print this message.
 --v8-options       Print V8 command line options.
 --deps             Print module dependencies.
---types            Print runtime TypeScript declarations."
+--types            Print runtime TypeScript declarations.
+
+Environment variables:
+DENO_DIR           Set deno's base directory."
   );
 }
 
diff --git a/src/isolate.rs b/src/isolate.rs
index 5a09b8855c..7860b216b4 100644
--- a/src/isolate.rs
+++ b/src/isolate.rs
@@ -12,8 +12,10 @@ use libdeno;
 use futures::Future;
 use libc::c_void;
 use std;
+use std::env;
 use std::ffi::CStr;
 use std::ffi::CString;
+use std::path::Path;
 use std::sync::mpsc;
 use std::sync::Arc;
 use std::sync::Mutex;
@@ -108,6 +110,15 @@ impl Isolate {
     // This channel handles sending async messages back to the runtime.
     let (tx, rx) = mpsc::channel::<(i32, Buf)>();
 
+    let custom_root_path;
+    let custom_root = match env::var("DENO_DIR") {
+      Ok(path) => {
+        custom_root_path = path;
+        Some(Path::new(custom_root_path.as_str()))
+      }
+      Err(_e) => None,
+    };
+
     Isolate {
       libdeno_isolate,
       dispatch,
@@ -115,7 +126,7 @@ impl Isolate {
       ntasks: 0,
       timeout_due: None,
       state: Arc::new(IsolateState {
-        dir: deno_dir::DenoDir::new(flags.reload, None).unwrap(),
+        dir: deno_dir::DenoDir::new(flags.reload, custom_root).unwrap(),
         argv: argv_rest,
         flags,
         tx: Mutex::new(Some(tx)),
diff --git a/tools/deno_dir_test.py b/tools/deno_dir_test.py
new file mode 100755
index 0000000000..571914fc63
--- /dev/null
+++ b/tools/deno_dir_test.py
@@ -0,0 +1,48 @@
+#!/usr/bin/env python
+# Check deno dir is created properly
+# Usage: deno_dir_test.py [path to deno dir]
+import os
+import subprocess
+import sys
+from util import rmtree, run
+
+def deno_dir_test(deno_exe, deno_dir):
+    assert os.path.isfile(deno_exe)
+
+    old_deno_dir = None
+    if "DENO_DIR" in os.environ:
+        old_deno_dir = os.environ["DENO_DIR"]
+        del os.environ["DENO_DIR"]
+
+    if os.path.isdir(deno_dir):
+        rmtree(deno_dir)
+
+    # Run deno with no env flag
+    run_deno(deno_exe)
+    assert not os.path.isdir(deno_dir)
+
+    # Run deno with DENO_DIR env flag
+    run_deno(deno_exe, deno_dir)
+    assert os.path.isdir(deno_dir)
+    assert os.path.isdir(os.path.join(deno_dir, "deps"))
+    assert os.path.isdir(os.path.join(deno_dir, "gen"))
+    rmtree(deno_dir)
+
+    if old_deno_dir is not None:
+      os.environ["DENO_DIR"] = old_deno_dir
+
+
+def run_deno(deno_exe, deno_dir=None):
+    cmd = [deno_exe, "tests/002_hello.ts"]
+    deno_dir_env = {"DENO_DIR": deno_dir} if deno_dir is not None else None
+    run(cmd, quiet=True, env=deno_dir_env)
+
+def main(argv):
+    if len(sys.argv) != 3:
+        print "Usage ./tools/deno_dir_test.py out/debug/deno out/debug/.deno_dir"
+        sys.exit(1)
+    deno_dir_test(argv[1], argv[2])
+
+
+if __name__ == '__main__':
+    sys.exit(main(sys.argv))
diff --git a/tools/test.py b/tools/test.py
index 45c9f5e2b7..d2a7944e63 100755
--- a/tools/test.py
+++ b/tools/test.py
@@ -4,8 +4,9 @@
 import os
 import sys
 from check_output_test import check_output_test
+from deno_dir_test import deno_dir_test
 from setup_test import setup_test
-from util import build_path, enable_ansi_colors, executable_suffix, run
+from util import build_path, enable_ansi_colors, executable_suffix, run, rmtree
 from unit_tests import unit_tests
 from util_test import util_test
 from benchmark_test import benchmark_test
@@ -29,6 +30,11 @@ def main(argv):
         print "Usage: tools/test.py [build_dir]"
         sys.exit(1)
 
+    deno_dir = os.path.join(build_dir, ".deno_test")
+    if os.path.isdir(deno_dir):
+        rmtree(deno_dir)
+    os.environ["DENO_DIR"] = deno_dir
+
     enable_ansi_colors()
 
     http_server.spawn()
@@ -56,6 +62,10 @@ def main(argv):
     check_output_test(deno_exe)
     check_output_test(deno_ns_exe)
 
+    rmtree(deno_dir)
+
+    deno_dir_test(deno_exe, deno_dir)
+
 
 if __name__ == '__main__':
     sys.exit(main(sys.argv))