diff --git a/eclipse/plugin.jelly b/eclipse/plugin.jelly
index 7f56bced..abcc1bc8 100644
--- a/eclipse/plugin.jelly
+++ b/eclipse/plugin.jelly
@@ -48,34 +48,49 @@
     </j:file>
   </goal>
 	
+
+  <!--==================================================================-->
+  <!-- Generate Eclipse  .classpath file                   -->
+  <!--==================================================================-->    
   <goal name="eclipse:generate-classpath"
     description="Generate Eclipse .classpath file">
   
-    <ant:echo>Creating ${basedir}/.classpath ...</ant:echo>
-    
-    <j:set var="outputDir" value="${maven.eclipse.output.dir}"/>
-    <j:if test="${empty outputDir}">
-      <j:set var="outputDir" value="target/classes"/>
-    </j:if>
+    <ant:echo>Creating ${basedir}/.classpath ...</ant:echo>                
     
     <j:file name="${basedir}/.classpath" prettyPrint="true" xmlns="dummy">
-      <classpath>
+      <classpath>            
+        <j:if test="${sourcesPresent}">
+          <j:set var="srcDir" value="${pom.build.sourceDirectory}"/>
+          <j:if test="${ srcDir.startsWith( basedir ) }">
+             <ant:echo>Cutting of basedir from sourceDirectory</ant:echo>
+             <j:set var="srcDir" value="${srcDir.substring(basedir.length())}"/>             
+             <!-- 
+               cut off also slash or backslash from basedir. 
+               Is there a way to make it in one step in Jelly?
+              -->
+             <j:set var="srcDir" value="${srcDir.substring(1)}"/>             
+          </j:if>
+          <classpathentry kind="src" path="${srcDir}"/>
+        </j:if>
+      
+        <j:if test="${unitTestSourcesPresent}">
+          <j:set var="testSrcDir" value="${pom.build.unitTestSourceDirectory}"/>
+          <j:if test="${ testSrcDir.startsWith( basedir ) }">
+             <ant:echo>Cutting of basedir from testSourceDirectory</ant:echo>
+             <j:set var="testSrcDir" value="${testSrcDir.substring(basedir.length())}"/>             
+             <!-- cut off also slash or backslash -->
+             <j:set var="testSrcDir" value="${testSrcDir.substring(1)}"/>             
+          </j:if>
+          <classpathentry kind="src" path="${testSrcDir}"/>
+         <!-- Here are the rules:
+              If the project has maven.eclipse.junit property, add that ver of junit
+              If the project has maven.eclipse.junit property and it is empty, don't add junit
+              If the project has junit dep, use that.
+              Use the test plugin version
+           -->
+         <j:set var="verX" value="${maven.eclipse.junit}X"/>
 
-      <j:if test="${sourcesPresent}">
-        <classpathentry kind="src" path="${pom.build.sourceDirectory}"/>
-      </j:if>
-
-      <j:if test="${unitTestSourcesPresent}">
-        <classpathentry kind="src" path="${pom.build.unitTestSourceDirectory}"/>
-        <!-- Here are the rules:
-             If the project has maven.eclipse.junit property, add that ver of junit
-             If the project has maven.eclipse.junit property and it is empty, don't add junit
-             If the project has junit dep, use that.
-             Use the test plugin version
-          -->
-        <j:set var="verX" value="${maven.eclipse.junit}X"/>
-
-        <j:set var="depVersion">${pom.getPluginContext('maven-test-plugin').getVariable('plugin').getDependency('junit').getVersion()}</j:set>
+         <j:set var="depVersion">${pom.getPluginContext('maven-test-plugin').getVariable('plugin').getDependency('junit').getVersion()}</j:set>
       
         <j:if test="${pom.getDependency('junit') != null}">
           <j:set var="depVersion" value="${pom.getDependency('junit').getVersion()}"/>
@@ -112,8 +127,39 @@
         </j:forEach>
         
       <!-- add the unit test build directory so that any files generated via Maven are available -->  
-      <classpathentry kind="lib" path="target/test-classes"/>  
       
+      
+      <j:if test="${unitTestSourcesPresent}">
+        <j:set var="testOutputDir" value="${maven.eclipse.test.output.dir}"/>
+          <j:if test="${empty testOutputDir}">
+            <j:set var="testOutputDir" 
+                   value="${pom.getPluginContext('maven-test-plugin').getVariable('maven.test.dest')}"/>      
+          </j:if>
+          <j:if test="${ testOutputDir.startsWith( basedir ) }">
+            <ant:echo>Cutting of basedir from testOutputDir</ant:echo>
+            <j:set var="testOutputDir" value="${testOutputDir.substring(basedir.length())}"/>             
+            <!-- 
+              cut off also slash or backslash from basedir. 
+              Is there a way to make it in one step in Jelly?
+            -->
+            <j:set var="testOutputDir" value="${testOutputDir.substring(1)}"/>             
+          </j:if>  
+          <classpathentry kind="lib" path="{$testOutputDir}"/>  
+      </j:if>
+      
+      <j:set var="outputDir" value="${maven.eclipse.output.dir}"/>
+        <j:if test="${empty outputDir}">
+          <j:set var="outputDir" value="${maven.build.dest}"/>      
+         </j:if>
+         <j:if test="${ outputDir.startsWith( basedir ) }">
+           <ant:echo>Cutting of basedir from outputDir</ant:echo>
+           <j:set var="outputDir" value="${outputDir.substring(basedir.length())}"/>             
+           <!-- 
+             cut off also slash or backslash from basedir. 
+            Is there a way to make it in one step in Jelly?
+           -->
+           <j:set var="outputDir" value="${outputDir.substring(1)}"/>             
+        </j:if>            
       <classpathentry kind="output" path="${outputDir}"/>
     </classpath>
   </j:file>  
diff --git a/eclipse/xdocs/changes.xml b/eclipse/xdocs/changes.xml
index 152a6d84..18a8f24b 100644
--- a/eclipse/xdocs/changes.xml
+++ b/eclipse/xdocs/changes.xml
@@ -7,6 +7,12 @@
 
   <body>
     <release version="1.3" date="In CVS">
+      <action dev="michal" type="add">
+        Smarter generation of .classpath file.
+        ${basedir} prefix is cut off if present in any path.
+        Default Maven location of source and destination folder
+        are used.
+      </action>      
       <action dev="evenisse" type="add">
         Added dependency functionality between projects
       </action>
diff --git a/eclipse/xdocs/properties.xml b/eclipse/xdocs/properties.xml
index b0850738..0bbd0e33 100644
--- a/eclipse/xdocs/properties.xml
+++ b/eclipse/xdocs/properties.xml
@@ -40,7 +40,7 @@
         </tr>
         <tr>
           <td>maven.eclipse.output.dir</td>
-          <td>Yes (default=target/classes)</td>
+          <td>Yes (default=${maven.build.dest)</td>
           <td>
 			The directory to which Eclipse should output its classes.
 			By default this is the same directory as Maven generates its code
@@ -48,6 +48,13 @@
 			does not interfere with Eclipse's build.
           </td>
         </tr>
+        <tr>
+          <td>maven.eclipse.test.output.dir</td>
+          <td>Yes (default=${maven.test.dest} defined in test plugin)</td>
+          <td>
+			The directory to which Eclipse should output its test classes.
+          </td>
+        </tr>
       </table>
 	  <p>
 		Note that you will need to defined a <code>MAVEN_REPO</code> Java