diff --git a/lib/ansible/constants.py b/lib/ansible/constants.py
index ea1a23a59b..290c995272 100644
--- a/lib/ansible/constants.py
+++ b/lib/ansible/constants.py
@@ -82,13 +82,13 @@ p = load_config_file()
 
 active_user   = pwd.getpwuid(os.geteuid())[0]
 
-# Needed so the RPM can call setup.py and have modules land in the
-# correct location. See #1277 for discussion
-if getattr(sys, "real_prefix", None):
-    # in a virtualenv
-    DIST_MODULE_PATH = os.path.join(sys.prefix, 'share/ansible/')
-else:
-    DIST_MODULE_PATH = '/usr/share/ansible/'
+DIST_MODULE_PATH = os.path.join(sys.prefix, 'share/ansible/')
+EDITABLE_MODULE_PATH = os.path.normpath(
+    os.path.join(os.path.dirname(__file__), '../../library'))
+
+if not os.path.exists(DIST_MODULE_PATH) \
+        and os.path.exists(EDITABLE_MODULE_PATH):
+    DIST_MODULE_PATH = EDITABLE_MODULE_PATH
 
 # check all of these extensions when looking for yaml files for things like
 # group variables
diff --git a/setup.py b/setup.py
index c802eca6fd..9012498305 100644
--- a/setup.py
+++ b/setup.py
@@ -4,15 +4,27 @@ import os
 import sys
 from glob import glob
 
-sys.path.insert(0, os.path.abspath('lib'))
+def rel(f):
+    return os.path.join(os.path.dirname(__file__), f)
+
+sys.path.insert(0, rel('lib'))
 from ansible import __version__, __author__
 from distutils.core import setup
 
-# find library modules
-from ansible.constants import DEFAULT_MODULE_PATH
-dirs=os.listdir("./library/")
+# Needed so the RPM can call setup.py and have modules land in the
+# correct location. See #1277 for discussion
+if getattr(sys, "real_prefix", None):
+    # in a virtualenv
+    DEFAULT_MODULE_PATH = os.path.join(sys.prefix, 'share/ansible/library')
+else:
+    DEFAULT_MODULE_PATH = '/usr/share/ansible/library'
+
+module_path = DEFAULT_MODULE_PATH
+if not os.path.exists(DEFAULT_MODULE_PATH):
+    module_path = rel('library')
+
 data_files = []
-for i in dirs:
+for i in os.listdir(module_path):
     data_files.append((os.path.join(DEFAULT_MODULE_PATH, i), glob('./library/' + i + '/*')))
 
 setup(name='ansible',
@@ -23,7 +35,7 @@ setup(name='ansible',
       url='http://ansibleworks.com/',
       license='GPLv3',
       install_requires=['paramiko', 'jinja2', "PyYAML"],
-      package_dir={ 'ansible': 'lib/ansible' },
+      package_dir={ '': 'lib' },
       packages=[
          'ansible',
          'ansible.utils',