diff --git a/src/compiler/builder.ts b/src/compiler/builder.ts
index 7973a4cc8dd64..62dd670fbc5f6 100644
--- a/src/compiler/builder.ts
+++ b/src/compiler/builder.ts
@@ -64,7 +64,9 @@ namespace ts {
         const state = BuilderState.create(newProgram, getCanonicalFileName, oldState) as BuilderProgramState;
         state.program = newProgram;
         const compilerOptions = newProgram.getCompilerOptions();
-        if (!compilerOptions.outFile && !compilerOptions.out) {
+        // With --out or --outFile, any change affects all semantic diagnostics so no need to cache them
+        // With --isolatedModules, emitting changed file doesnt emit dependent files so we cant know of dependent files to retrieve errors so dont cache the errors
+        if (!compilerOptions.outFile && !compilerOptions.out && !compilerOptions.isolatedModules) {
             state.semanticDiagnosticsPerFile = createMap<ReadonlyArray<Diagnostic>>();
         }
         state.changedFilesSet = createMap<true>();
@@ -338,15 +340,19 @@ namespace ts {
      */
     function getSemanticDiagnosticsOfFile(state: BuilderProgramState, sourceFile: SourceFile, cancellationToken?: CancellationToken): ReadonlyArray<Diagnostic> {
         const path = sourceFile.path;
-        const cachedDiagnostics = state.semanticDiagnosticsPerFile!.get(path);
-        // Report the semantic diagnostics from the cache if we already have those diagnostics present
-        if (cachedDiagnostics) {
-            return cachedDiagnostics;
+        if (state.semanticDiagnosticsPerFile) {
+            const cachedDiagnostics = state.semanticDiagnosticsPerFile.get(path);
+            // Report the semantic diagnostics from the cache if we already have those diagnostics present
+            if (cachedDiagnostics) {
+                return cachedDiagnostics;
+            }
         }
 
         // Diagnostics werent cached, get them from program, and cache the result
         const diagnostics = state.program.getSemanticDiagnostics(sourceFile, cancellationToken);
-        state.semanticDiagnosticsPerFile!.set(path, diagnostics);
+        if (state.semanticDiagnosticsPerFile) {
+            state.semanticDiagnosticsPerFile.set(path, diagnostics);
+        }
         return diagnostics;
     }
 
diff --git a/src/testRunner/unittests/tscWatch/programUpdates.ts b/src/testRunner/unittests/tscWatch/programUpdates.ts
index 45ff6fba7c5b8..b322c08bfe7f8 100644
--- a/src/testRunner/unittests/tscWatch/programUpdates.ts
+++ b/src/testRunner/unittests/tscWatch/programUpdates.ts
@@ -1281,7 +1281,59 @@ interface Document {
                 checkProgramActualFiles(watch(), [aFile.path, bFile.path, libFile.path]);
             }
         });
-    });
 
+        it("reports errors correctly with isolatedModules", () => {
+            const currentDirectory = "/user/username/projects/myproject";
+            const aFile: File = {
+                path: `${currentDirectory}/a.ts`,
+                content: `export const a: string = "";`
+            };
+            const bFile: File = {
+                path: `${currentDirectory}/b.ts`,
+                content: `import { a } from "./a";
+const b: string = a;`
+            };
+            const configFile: File = {
+                path: `${currentDirectory}/tsconfig.json`,
+                content: JSON.stringify({
+                    compilerOptions: {
+                        isolatedModules: true
+                    }
+                })
+            };
+
+            const files = [aFile, bFile, libFile, configFile];
 
+            const host = createWatchedSystem(files, { currentDirectory });
+            const watch = createWatchOfConfigFile("tsconfig.json", host);
+            verifyProgramFiles();
+            checkOutputErrorsInitial(host, emptyArray);
+            assert.equal(host.readFile(`${currentDirectory}/a.js`), `"use strict";
+exports.__esModule = true;
+exports.a = "";
+`, "Contents of a.js");
+            assert.equal(host.readFile(`${currentDirectory}/b.js`), `"use strict";
+exports.__esModule = true;
+var a_1 = require("./a");
+var b = a_1.a;
+`, "Contents of b.js");
+            const modifiedTime = host.getModifiedTime(`${currentDirectory}/b.js`);
+
+            host.writeFile(aFile.path, `export const a: number = 1`);
+            host.runQueuedTimeoutCallbacks();
+            verifyProgramFiles();
+            checkOutputErrorsIncremental(host, [
+                getDiagnosticOfFileFromProgram(watch(), bFile.path, bFile.content.indexOf("b"), 1, Diagnostics.Type_0_is_not_assignable_to_type_1, "number", "string")
+            ]);
+            assert.equal(host.readFile(`${currentDirectory}/a.js`), `"use strict";
+exports.__esModule = true;
+exports.a = 1;
+`, "Contents of a.js");
+            assert.equal(host.getModifiedTime(`${currentDirectory}/b.js`), modifiedTime, "Timestamp of b.js");
+
+            function verifyProgramFiles() {
+                checkProgramActualFiles(watch(), [aFile.path, bFile.path, libFile.path]);
+            }
+        });
+    });
 }