diff --git a/.gitignore b/.gitignore
index 7c759d8..97be1d3 100755
--- a/.gitignore
+++ b/.gitignore
@@ -18,3 +18,6 @@ share
 latest_source_cache
 src_gen
 docs/api
+test/test_nested_jars_outer.jar
+test/test_nested_jars_support/*.class
+test/test_nested_jars_support/*.jar
diff --git a/src/org/jruby/util/JRubyClassLoader.java b/src/org/jruby/util/JRubyClassLoader.java
index 1fa5dd5..52d8759 100644
--- a/src/org/jruby/util/JRubyClassLoader.java
+++ b/src/org/jruby/util/JRubyClassLoader.java
@@ -1,23 +1,73 @@
 package org.jruby.util;
 
+import static java.util.logging.Logger.getLogger;
+import java.io.File;
+import java.io.FileOutputStream;
+import java.io.InputStream;
+import java.io.OutputStream;
 import java.net.URL;
 import java.net.URLClassLoader;
 import java.security.ProtectionDomain;
+import java.util.HashMap;
 
 public class JRubyClassLoader extends URLClassLoader {
     private final static ProtectionDomain DEFAULT_DOMAIN
             = JRubyClassLoader.class.getProtectionDomain();
 
+    public static final boolean DEBUG = false;
+    private HashMap<URL, URL> embeddedJarToExpandedJar;
+
     public JRubyClassLoader(ClassLoader parent) {
         super(new URL[0], parent);
+        embeddedJarToExpandedJar = new HashMap<URL, URL>();
     }
 
     // Change visibility so others can see it
     @Override
     public void addURL(URL url) {
+        if(url.getProtocol().equals("jar")) {
+            try {
+                synchronized(embeddedJarToExpandedJar) {
+                    if(isEmbeddedJarAlreadyExpanded(url)) return;
+                    URL tempFileURL = storeInTempFile(url);
+                    embeddedJarToExpandedJar.put(url, tempFileURL);
+                    url = tempFileURL;
+                }
+            } catch(Exception e) {
+                getLogger("JRubyClassLoader").severe("Unable to store " + url + " in a temp file: " + e);
+            }
+        }
         super.addURL(url);
     }
 
+    private boolean isEmbeddedJarAlreadyExpanded(URL url) throws Exception {
+        return embeddedJarToExpandedJar.containsKey(url) &&
+            new File(embeddedJarToExpandedJar.get(url).toURI()).exists();
+    }
+
+    private URL storeInTempFile(URL embeddedJarUrl) throws Exception {
+        File tempFile = File.createTempFile("jruby_inner_jar_", ".jar");
+        if(DEBUG) getLogger("JRubyClassLoader").info("Created temp file " + tempFile + " to store the jar " + embeddedJarUrl);
+        copy(embeddedJarUrl, tempFile);
+        return tempFile.toURL();
+    }
+
+    private void copy(URL source, File destination) throws Exception {
+        InputStream sourceStream = source.openStream();
+        OutputStream destinationStream = new FileOutputStream(destination);
+        copy(sourceStream, destinationStream);
+        sourceStream.close();
+        destinationStream.close();
+    }
+
+    private void copy(InputStream source, OutputStream destination) throws Exception {
+        byte [] buffer = new byte[8192];
+        int bytesRead;
+        while(0 < (bytesRead = source.read(buffer))) {
+            destination.write(buffer, 0, bytesRead);
+        }
+    }
+
     public Class<?> defineClass(String name, byte[] bytes) {
         return super.defineClass(name, bytes, 0, bytes.length, DEFAULT_DOMAIN);
      }
diff --git a/test/test_nested_jars.rb b/test/test_nested_jars.rb
new file mode 100644
index 0000000..9e9ad0f
--- /dev/null
+++ b/test/test_nested_jars.rb
@@ -0,0 +1,32 @@
+require 'test/unit'
+
+class TestNestedJars < Test::Unit::TestCase
+  def setup
+    $: << File.dirname(__FILE__)
+    begin
+      require 'test_nested_jars_outer.jar'
+    rescue LoadError
+      build_jars
+      require 'test_nested_jars_outer.jar'
+    end
+    require 'inner.jar'
+  end
+
+  def build_jars
+    Dir.chdir(File.dirname(__FILE__) + '/test_nested_jars_support') do
+      require 'rake'
+      sh 'javac', FileList['*.java']
+      sh 'jar', 'cf', 'inner.jar', FileList['*.class'], FileList['*.rb']
+      sh 'jar', 'cf', '../test_nested_jars_outer.jar', 'inner.jar'
+    end
+  end
+
+  def test_should_find_nested_java_class
+    assert_equal 'hello from java', Java::TestNestedJavaClass.new.hello
+  end
+
+  def test_should_find_nested_ruby_class
+    require 'test_nested_ruby_class'
+    assert_equal 'hello from ruby', TestNestedRubyClass.new.hello
+  end
+end
diff --git a/test/test_nested_jars_support/TestNestedJavaClass.java b/test/test_nested_jars_support/TestNestedJavaClass.java
new file mode 100644
index 0000000..d17ecb8
--- /dev/null
+++ b/test/test_nested_jars_support/TestNestedJavaClass.java
@@ -0,0 +1,4 @@
+public class TestNestedJavaClass
+{
+  public String hello() { return "hello from java"; }
+}
diff --git a/test/test_nested_jars_support/test_nested_ruby_class.rb b/test/test_nested_jars_support/test_nested_ruby_class.rb
new file mode 100644
index 0000000..b683360
--- /dev/null
+++ b/test/test_nested_jars_support/test_nested_ruby_class.rb
@@ -0,0 +1,5 @@
+class TestNestedRubyClass
+  def hello
+    'hello from ruby'
+  end
+end