Look for SDK packages in "pkg" in addition to "lib".

utils/pub/sdk_source.dart

 // Copyright (c) 2012, the Dart project authors.  Please see the AUTHORS file
 // for details. All rights reserved. Use of this source code is governed by a
 // BSD-style license that can be found in the LICENSE file.
 
 #library('sdk_source');
 
 #import('io.dart');
 #import('package.dart');
 #import('pubspec.dart');
 #import('source.dart');
@@ skipping 30 matching lines @@
       var version = new Version.parse("0.0.0-r.${revision.trim()}");
       return new Pubspec(version, <PackageRef>[]);
     });
   }
 
   /**
    * Since all the SDK files are already available locally, installation just
    * involves symlinking the SDK library into the packages directory.
    */
   Future<bool> install(PackageId id, String destPath) {
-    var sourcePath = join(rootDir, "lib", id.description);
-    return exists(sourcePath).chain((exists) {
-      if (!exists) return new Future<bool>.immediate(false);
+    // Look in "pkg" first.
+    var sourcePath = join(rootDir, "pkg", id.description);
+    return exists(sourcePath).chain((found) {
+      if (!found) {
+        // TODO(rnystrom): Get rid of this when all SDK packages are moved from
+        // "lib" to "pkg".
+        // Not in "pkg", so try "lib".
+        sourcePath = join(rootDir, "lib", id.description);
+        return exists(sourcePath).chain((found) {
+          if (!found) return new Future<bool>.immediate(false);
+          return createSymlink(sourcePath, destPath).transform((_) => true);
+        });
+      }
       return createSymlink(sourcePath, destPath).transform((_) => true);
     });
   }
 }