diff --git a/examples/whitespace.cs b/examples/whitespace.cs
new file mode 100644
index 00000000..94fa5e7e
--- /dev/null
+++ b/examples/whitespace.cs
@@ -0,0 +1,12 @@
+# square: x => x * x
+
+square: x =>
+  x * x
+
+elements.each(el =>
+  el.click(event =>
+    el.show()
+  )
+)
+
+a: 5
\ No newline at end of file
diff --git a/examples/whitespace.js b/examples/whitespace.js
new file mode 100644
index 00000000..3d0af9e5
--- /dev/null
+++ b/examples/whitespace.js
@@ -0,0 +1,8 @@
+(function(){
+
+  // square: x => x * x
+  var square = function(x) {
+    return x * x;
+  };
+  var a = 5;
+})();
\ No newline at end of file
diff --git a/lib/coffee_script/grammar.y b/lib/coffee_script/grammar.y
index c31d5196..38132871 100644
--- a/lib/coffee_script/grammar.y
+++ b/lib/coffee_script/grammar.y
@@ -15,6 +15,7 @@ token SUPER
 token NEWLINE
 token COMMENT
 token JS
+token INDENT OUTDENT
 
 # Declare order of operations.
 prechigh
@@ -32,7 +33,8 @@ prechigh
   right    THROW FOR IN WHILE NEW
   left     UNLESS IF ELSE
   left     ":" '||:' '&&:'
-  right    RETURN
+  right    RETURN INDENT
+  left     OUTDENT
 preclow
 
 # We expect 4 shift/reduce errors for optional syntax.
@@ -84,6 +86,11 @@ rule
   | Comment
   ;
 
+  Block:
+    Expression Terminator             { result = Expressions.new([val[0]]) }
+  | INDENT Expressions OUTDENT        { result = val[1] }
+  ;
+
   # All tokens that can terminate an expression.
   Terminator:
     "\n"
@@ -191,14 +198,14 @@ rule
 
   # Function definition.
   Code:
-    ParamList "=>" CodeBody "."       { result = CodeNode.new(val[0], val[2]) }
-  | "=>" CodeBody "."                 { result = CodeNode.new([], val[1]) }
+    ParamList "=>" CodeBody           { result = CodeNode.new(val[0], val[2]) }
+  | "=>" CodeBody                     { result = CodeNode.new([], val[1]) }
   ;
 
   # The body of a function.
   CodeBody:
     /* nothing */                     { result = Expressions.new([]) }
-  | Expressions                       { result = val[0] }
+  | Block                             { result = val[0] }
   ;
 
   # The parameters to a function definition.
@@ -279,15 +286,15 @@ rule
 
   # Try/catch/finally exception handling blocks.
   Try:
-    TRY Expressions Catch "."         { result = TryNode.new(val[1], val[2][0], val[2][1]) }
+    TRY Expressions Catch             { result = TryNode.new(val[1], val[2][0], val[2][1]) }
   | TRY Expressions Catch
-    FINALLY Expressions "."           { result = TryNode.new(val[1], val[2][0], val[2][1], val[4]) }
+    FINALLY Block                     { result = TryNode.new(val[1], val[2][0], val[2][1], val[4]) }
   ;
 
   # A catch clause.
   Catch:
     /* nothing */                     { result = [nil, nil] }
-  | CATCH IDENTIFIER Expressions      { result = [val[1], val[2]] }
+  | CATCH IDENTIFIER Block            { result = [val[1], val[2]] }
   ;
 
   # Throw an exception.
@@ -302,32 +309,31 @@ rule
 
   # The while loop. (there is no do..while).
   While:
-    WHILE Expression Then
-      Expressions "."                 { result = WhileNode.new(val[1], val[3]) }
+    WHILE Expression Then Block       { result = WhileNode.new(val[1], val[3]) }
   ;
 
   # Array comprehensions, including guard and current index.
   For:
   Expression FOR IDENTIFIER
-    IN PureExpression "."             { result = ForNode.new(val[0], val[4], val[2], nil) }
+    IN PureExpression                 { result = ForNode.new(val[0], val[4], val[2], nil) }
   | Expression FOR
       IDENTIFIER "," IDENTIFIER
-      IN PureExpression "."           { result = ForNode.new(val[0], val[6], val[2], nil, val[4]) }
+      IN PureExpression               { result = ForNode.new(val[0], val[6], val[2], nil, val[4]) }
   | Expression FOR IDENTIFIER
       IN PureExpression
-      IF Expression "."               { result = ForNode.new(val[0], val[4], val[2], val[6]) }
+      IF Expression                   { result = ForNode.new(val[0], val[4], val[2], val[6]) }
   | Expression FOR
       IDENTIFIER "," IDENTIFIER
       IN PureExpression
-      IF Expression "."               { result = ForNode.new(val[0], val[6], val[2], val[8], val[4]) }
+      IF Expression                   { result = ForNode.new(val[0], val[6], val[2], val[8], val[4]) }
   ;
 
   # Switch/When blocks.
   Switch:
     SWITCH Expression Then
-      Whens "."                       { result = val[3].rewrite_condition(val[1]) }
+      Whens                           { result = val[3].rewrite_condition(val[1]) }
   | SWITCH Expression Then
-      Whens ELSE Expressions "."      { result = val[3].rewrite_condition(val[1]).add_else(val[5]) }
+      Whens ELSE Block                { result = val[3].rewrite_condition(val[1]).add_else(val[5]) }
   ;
 
   # The inner list of whens.
@@ -338,7 +344,7 @@ rule
 
   # An individual when.
   When:
-    WHEN Expression Then Expressions  { result = IfNode.new(val[1], val[3]) }
+    WHEN Expression Then Block        { result = IfNode.new(val[1], val[3]) }
   ;
 
   # All of the following nutso if-else destructuring is to make the
@@ -358,8 +364,8 @@ rule
 
   # Terminating else bodies are strictly optional.
   ElseBody
-    "."                               { result = nil }
-  | ELSE Expressions "."              { result = val[1] }
+    /* nothing */                     { result = nil }
+  | ELSE Block                        { result = val[1] }
   ;
 
   # All the alternatives for ending an if-else block.
diff --git a/lib/coffee_script/lexer.rb b/lib/coffee_script/lexer.rb
index 683de472..bb25ed07 100644
--- a/lib/coffee_script/lexer.rb
+++ b/lib/coffee_script/lexer.rb
@@ -28,6 +28,7 @@ module CoffeeScript
     COMMENT    = /\A((#[^\n]*\s*)+)/m
     CODE       = /\A(=>)/
     REGEX      = /\A(\/(.*?)[^\\]\/[imgy]{0,4})/
+    INDENT     = /\A\n( *)/
 
     # Token cleaning regexes.
     JS_CLEANER = /(\A`|`\Z)/
@@ -45,6 +46,8 @@ module CoffeeScript
       @code = code.chomp  # Cleanup code by remove extra line breaks
       @i = 0              # Current character position we're parsing
       @line = 1           # The current line.
+      @indent = 0         # The current indent level.
+      @indents = []       # The stack of all indent levels we are currently within.
       @tokens = []        # Collection of all parsed tokens in the form [:TOKEN_TYPE, value]
       while @i < @code.length
         @chunk = @code[@i..-1]
@@ -62,6 +65,7 @@ module CoffeeScript
       return if js_token
       return if regex_token
       return if comment_token
+      return if indent_token
       return if whitespace_token
       return    literal_token
     end
@@ -118,6 +122,23 @@ module CoffeeScript
       @i += comment.length
     end
 
+    def indent_token
+      return false unless indent = @chunk[INDENT, 1]
+      size = indent.size
+      return literal_token if size == @indent
+      if size > @indent
+        tag = :INDENT
+        @indent = size
+        @indents << @indent
+      else
+        tag = :OUTDENT
+        @indents.pop
+        @indent = @indents.first || 0
+      end
+      @i += (size + 1)
+      token(tag, size)
+    end
+
     # Matches and consumes non-meaningful whitespace.
     def whitespace_token
       return false unless whitespace = @chunk[WHITESPACE, 1]
@@ -182,6 +203,13 @@ module CoffeeScript
       @tokens.pop if last_value == "\n"
     end
 
+    # Close up all remaining open blocks.
+    def close_indentation
+      while indent = @indents.pop
+        token(:OUTDENT, @indents.first || 0)
+      end
+    end
+
   end
 
 end
\ No newline at end of file