diff --git a/package.json b/package.json
index 81e8c3135162..f6fad5684dc6 100644
--- a/package.json
+++ b/package.json
@@ -66,6 +66,7 @@
     "isbinaryfile": "^3.0.0",
     "istanbul-instrumenter-loader": "^2.0.0",
     "json-loader": "^0.5.4",
+    "karma-source-map-support": "^1.2.0",
     "less": "^2.7.2",
     "less-loader": "^4.0.5",
     "license-webpack-plugin": "^0.4.3",
diff --git a/packages/@angular/cli/package.json b/packages/@angular/cli/package.json
index b21e4189fd4c..7c402bf8ab79 100644
--- a/packages/@angular/cli/package.json
+++ b/packages/@angular/cli/package.json
@@ -53,6 +53,7 @@
     "inquirer": "^3.0.0",
     "isbinaryfile": "^3.0.0",
     "json-loader": "^0.5.4",
+    "karma-source-map-support": "^1.2.0",
     "less": "^2.7.2",
     "less-loader": "^4.0.5",
     "license-webpack-plugin": "^0.4.2",
diff --git a/packages/@angular/cli/plugins/karma.ts b/packages/@angular/cli/plugins/karma.ts
index 8025af5f23f8..2183bd0f257e 100644
--- a/packages/@angular/cli/plugins/karma.ts
+++ b/packages/@angular/cli/plugins/karma.ts
@@ -8,6 +8,14 @@ import { Pattern } from './glob-copy-webpack-plugin';
 import { WebpackTestConfig, WebpackTestOptions } from '../models/webpack-test-config';
 import { KarmaWebpackThrowError } from './karma-webpack-throw-error';
 
+/**
+ * Enumerate needed (but not require/imported) dependencies from this file
+ *  to let the dependency validator know they are used.
+ *
+ * require('karma-source-map-support')
+ */
+
+
 const getAppFromConfig = require('../utilities/app-utils').getAppFromConfig;
 
 let blocked: any[] = [];
@@ -54,6 +62,22 @@ const init: any = (config: any, emitter: any, customFileHandlers: any) => {
     progress: true,
   }, config.angularCli);
 
+  if (testConfig.sourcemaps) {
+    // Add a reporter that fixes sourcemap urls.
+    config.reporters.unshift('@angular/cli');
+
+    // Code taken from https://github.com/tschaub/karma-source-map-support.
+    // We can't use it directly because we need to add it conditionally in this file, and karma
+    // frameworks cannot be added dynamically.
+    const smsPath = path.dirname(require.resolve('source-map-support'));
+    const ksmsPath = path.dirname(require.resolve('karma-source-map-support'));
+
+    addKarmaFiles(config.files, [
+      { pattern: path.join(smsPath, 'browser-source-map-support.js'), watched: false },
+      { pattern: path.join(ksmsPath, 'client.js'), watched: false }
+    ], true);
+  }
+
   // Add assets. This logic is mimics the one present in GlobCopyWebpackPlugin.
   if (appConfig.assets) {
     config.proxies = config.proxies || {};
@@ -227,9 +251,25 @@ function requestBlocker() {
   };
 }
 
-// Also export karma-webpack and karma-sourcemap-loader.
+// Strip the server address and webpack scheme (webpack://) from error log.
+const initSourcemapReporter: any = function (baseReporterDecorator: any) {
+  baseReporterDecorator(this);
+  const urlRegexp = /\(http:\/\/localhost:\d+\/_karma_webpack_\/webpack:\//gi;
+
+  this.onSpecComplete = function (_browser: any, result: any) {
+    if (!result.success && result.log.length > 0) {
+      result.log.forEach((log: string, idx: number) => {
+        result.log[idx] = log.replace(urlRegexp, '');
+      });
+    }
+  };
+};
+
+initSourcemapReporter.$inject = ['baseReporterDecorator'];
+
 module.exports = Object.assign({
   'framework:@angular/cli': ['factory', init],
   'preprocessor:@angular/cli': ['factory', preprocessor],
+  'reporter:@angular/cli': ['type', initSourcemapReporter],
   'middleware:angularCliBlocker': ['factory', requestBlocker]
 });
diff --git a/yarn.lock b/yarn.lock
index cd0000f1554b..fb6f2663c014 100644
--- a/yarn.lock
+++ b/yarn.lock
@@ -2950,6 +2950,12 @@ jsprim@^1.2.2:
     json-schema "0.2.3"
     verror "1.3.6"
 
+karma-source-map-support@^1.2.0:
+  version "1.2.0"
+  resolved "https://registry.yarnpkg.com/karma-source-map-support/-/karma-source-map-support-1.2.0.tgz#1bf81e7bb4b089627ab352ec4179e117c406a540"
+  dependencies:
+    source-map-support "^0.4.1"
+
 kind-of@^2.0.1:
   version "2.0.1"
   resolved "https://registry.yarnpkg.com/kind-of/-/kind-of-2.0.1.tgz#018ec7a4ce7e3a86cb9141be519d24c8faa981b5"
@@ -4758,7 +4764,7 @@ source-map-loader@^0.2.0:
     loader-utils "~0.2.2"
     source-map "~0.1.33"
 
-source-map-support@^0.4.0, source-map-support@^0.4.2:
+source-map-support@^0.4.0, source-map-support@^0.4.1, source-map-support@^0.4.2:
   version "0.4.15"
   resolved "https://registry.yarnpkg.com/source-map-support/-/source-map-support-0.4.15.tgz#03202df65c06d2bd8c7ec2362a193056fef8d3b1"
   dependencies: