diff --git a/packages/dsh-desktop-market-installer/generations/installer.mjs b/packages/dsh-desktop-market-installer/generations/installer.mjs
index 5131891cd..40eeb340c 100644
--- a/packages/dsh-desktop-market-installer/generations/installer.mjs
+++ b/packages/dsh-desktop-market-installer/generations/installer.mjs
@@ -281,7 +281,11 @@ export async function installGeneration(options) {
       const sourceCopy = join(stagingDir, 'source', pluginName.replace(/^@/u, '').replace(/[/\\]/gu, '+'))
       await mkdir(join(stagingDir, 'source'), { recursive: true })
       await cp(options.sourceDirectory, sourceCopy, { recursive: true, dereference: true })
-      installSpec = `file:${sourceCopy}`
+      // pnpm resolves file: specs against the staging project. On Windows an
+      // absolute `file:C:\...` is treated as a relative suffix, which produced
+      // doubled absolute paths across drives and junction spellings; the
+      // project-relative file:./ form is portable across both (#563).
+      installSpec = `file:./${relative(stagingDir, sourceCopy).replace(/\\/gu, '/')}`
     }
     trace(`installing ${options.sourceSpec ?? pluginSpec} into staging`)
     // A git subpackage can declare a pnpm version different from its workspace
@@ -560,7 +564,7 @@ async function resolveNonRootPackage(requireFromPackage, dependency) {
 
 /** Verify every installed package's required runtime dependency stays in an allowed closure. */
 export async function verifyGenerationPeers(dshHome, generation) {
-  const { createRequire } = await import('node:module')
+  const { createRequire, isBuiltin } = await import('node:module')
   const generationRoot = await realpath(generation.directory)
   const closure = await realpath(installationClosureDir(dshHome)).catch(
     () => installationClosureDir(dshHome)
@@ -625,6 +629,10 @@ export async function verifyGenerationPeers(dshHome, generation) {
         !Object.hasOwn(dependencies, dependency) &&
         !Object.hasOwn(optionalDependencies, dependency)
       if (optionalPeerOnly && !isHostSingleton(dependency)) continue
+      // Node builtins are not files to look up; treating their bare ids as
+      // paths produced false "resolves outside the generation and installation
+      // closure" rejections (#563).
+      if (isBuiltin(dependency)) continue
       let resolved
       try {
         resolved = requireFromPackage.resolve(dependency)
diff --git a/test/generation-installer.test.ts b/test/generation-installer.test.ts
index 83e92ea00..0c355a9fe 100644
--- a/test/generation-installer.test.ts
+++ b/test/generation-installer.test.ts
@@ -652,6 +652,66 @@ describe('the generation installer', () => {
     expect(result.problems).toContain('broken does not resolve from the generation or installation closure')
   })
 
+  it('hands pnpm a project-relative file: spec for local sources (#563)', async () => {
+    const home = await freshHome()
+    const source = join(home, 'local-source')
+    await mkdir(source, { recursive: true })
+    await writeFile(join(source, 'package.json'), JSON.stringify({ name: 'local-shape', version: '1.0.0' }))
+    const specs: string[] = []
+    const spawnProcess = (_executable: string, args: string[], spawnOptions: { cwd: string }) => {
+      specs.push(String(args[2]))
+      const listeners: Record<string, (value?: unknown) => void> = {}
+      const stream = { on: () => stream }
+      const child = {
+        stdout: stream,
+        stderr: stream,
+        once: (event: string, listener: (value?: unknown) => void) => {
+          listeners[event] = listener
+          return child
+        },
+        kill: () => undefined
+      }
+      void (async () => {
+        const pkg = join(spawnOptions.cwd, 'node_modules', 'local-shape')
+        await mkdir(pkg, { recursive: true })
+        await writeFile(join(pkg, 'package.json'), JSON.stringify({ name: 'local-shape', version: '1.0.0' }))
+        await writeFile(join(spawnOptions.cwd, 'pnpm-lock.yaml'), 'lockfileVersion: 9\n')
+        listeners.close?.(0)
+      })()
+      return child
+    }
+    const result = await installGeneration({
+      dshHome: home,
+      pluginSpec: 'file:local-source',
+      expectedPluginName: 'local-shape',
+      sourceDirectory: source,
+      nodeExecutablePath: 'node',
+      pnpmEntryPath: 'pnpm',
+      spawnProcess
+    })
+    expect(result.ok).toBe(true)
+    // The absolute `file:${sourceCopy}` form is read as a relative suffix by
+    // pnpm on Windows and produced doubled absolute paths across drives and
+    // junction spellings; the spec must stay project-relative and portable.
+    expect(specs).toEqual(['file:./source/local-shape'])
+  })
+
+  it('skips Node builtin dependencies instead of resolving them as files (#563)', async () => {
+    const home = await freshHome()
+    const directory = join(home, 'profiles', '.generations', 'live', 'builtin-deps')
+    const modules = join(directory, 'node_modules')
+    for (const [name, fields] of Object.entries({
+      'root-plugin': { dependencies: { 'node:fs': '*', 'node:crypto': '*', ordinary: '*' } },
+      ordinary: { main: 'index.js' }
+    })) {
+      await mkdir(join(modules, name), { recursive: true })
+      await writeFile(join(modules, name, 'package.json'), JSON.stringify({ name, ...fields }))
+    }
+    await writeFile(join(modules, 'ordinary', 'index.js'), 'module.exports = {}')
+    const generation = { id: 'builtin-deps', pluginName: 'root-plugin', version: '1.0.0', directory }
+    expect(await verifyGenerationPeers(home, generation)).toEqual({ ok: true, problems: [] })
+  })
+
   it('fails validation when a required ordinary dependency is missing', async () => {
     const home = await freshHome()
     const directory = join(home, 'profiles', '.generations', 'live', 'missing-dependency')