diff --git a/programs/tic-tac-toe/programs/tic-tac-toe/src/errors.rs b/programs/tic-tac-toe/programs/tic-tac-toe/src/errors.rs
new file mode 100644
index 0000000..7124e58
--- /dev/null
+++ b/programs/tic-tac-toe/programs/tic-tac-toe/src/errors.rs
@@ -0,0 +1,10 @@
+use anchor_lang::prelude::*;
+
+#[error_code]
+pub enum TicTacToeError {
+    TileOutOfBounds,
+    TileAlreadySet,
+    GameAlreadyOver,
+    NotPlayersTurn,
+    GameAlreadyStarted,
+}
diff --git a/programs/tic-tac-toe/programs/tic-tac-toe/src/instructions/mod.rs b/programs/tic-tac-toe/programs/tic-tac-toe/src/instructions/mod.rs
new file mode 100644
index 0000000..83c013b
--- /dev/null
+++ b/programs/tic-tac-toe/programs/tic-tac-toe/src/instructions/mod.rs
@@ -0,0 +1,5 @@
+pub use play::*;
+pub use setup_game::*;
+
+pub mod play;
+pub mod setup_game;
diff --git a/programs/tic-tac-toe/programs/tic-tac-toe/src/instructions/play.rs b/programs/tic-tac-toe/programs/tic-tac-toe/src/instructions/play.rs
new file mode 100644
index 0000000..0fd8342
--- /dev/null
+++ b/programs/tic-tac-toe/programs/tic-tac-toe/src/instructions/play.rs
@@ -0,0 +1,21 @@
+use crate::errors::TicTacToeError;
+use crate::state::game::*;
+use anchor_lang::prelude::*;
+
+pub fn play(ctx: Context<Play>, tile: Tile) -> Result<()> {
+    let game = &mut ctx.accounts.game;
+
+    require!(
+        game.current_player() == ctx.accounts.player.key(),
+        TicTacToeError::NotPlayersTurn
+    );
+
+    game.play(&tile)
+}
+
+#[derive(Accounts)]
+pub struct Play<'info> {
+    #[account(mut)]
+    pub game: Account<'info, Game>,
+    pub player: Signer<'info>,
+}
diff --git a/programs/tic-tac-toe/programs/tic-tac-toe/src/instructions/setup_game.rs b/programs/tic-tac-toe/programs/tic-tac-toe/src/instructions/setup_game.rs
new file mode 100644
index 0000000..e001f58
--- /dev/null
+++ b/programs/tic-tac-toe/programs/tic-tac-toe/src/instructions/setup_game.rs
@@ -0,0 +1,17 @@
+use crate::state::game::*;
+use anchor_lang::prelude::*;
+
+pub fn setup_game(ctx: Context<SetupGame>, player_two: Pubkey) -> Result<()> {
+    let game = &mut ctx.accounts.game;
+    game.set_players([ctx.accounts.player_one.key(), player_two]);
+    game.start()
+}
+
+#[derive(Accounts)]
+pub struct SetupGame<'info> {
+    #[account(init, payer = player_one, space = Game::MAXIMUM_SIZE + 8)]
+    pub game: Account<'info, Game>,
+    #[account(mut)]
+    pub player_one: Signer<'info>,
+    pub system_program: Program<'info, System>,
+}
diff --git a/programs/tic-tac-toe/programs/tic-tac-toe/src/lib.rs b/programs/tic-tac-toe/programs/tic-tac-toe/src/lib.rs
index 5b1f6ef..f7353f5 100644
--- a/programs/tic-tac-toe/programs/tic-tac-toe/src/lib.rs
+++ b/programs/tic-tac-toe/programs/tic-tac-toe/src/lib.rs
@@ -1,8 +1,10 @@
-use num_derive::*;
-use num_traits::*;
-use std::mem;
-
 use anchor_lang::prelude::*;
+use instructions::*;
+use state::game::Tile;
+
+pub mod errors;
+pub mod instructions;
+pub mod state;
 
 // this key needs to be changed to whatever public key is returned by "anchor keys list"
 declare_id!("Fg6PaFpoGXkYsidMpWTK6W2BeZ7FEfcYkg476zPFsLnS");
@@ -12,174 +14,10 @@ pub mod tic_tac_toe {
     use super::*;
 
     pub fn setup_game(ctx: Context<SetupGame>, player_two: Pubkey) -> Result<()> {
-        let game = &mut ctx.accounts.game;
-        game.players = [ctx.accounts.player_one.key(), player_two];
-        game.turn = 1;
-        Ok(())
+        instructions::setup_game::setup_game(ctx, player_two)
     }
 
     pub fn play(ctx: Context<Play>, tile: Tile) -> Result<()> {
-        let game = &mut ctx.accounts.game;
-
-        require!(
-            game.current_player() == ctx.accounts.player.key(),
-            TicTacToeError::NotPlayersTurn
-        );
-
-        game.play(&tile)
+        instructions::play::play(ctx, tile)
     }
 }
-
-#[error_code]
-pub enum TicTacToeError {
-    TileOutOfBounds,
-    TileAlreadySet,
-    GameAlreadyOver,
-    NotPlayersTurn,
-}
-
-#[derive(AnchorSerialize, AnchorDeserialize)]
-pub struct Tile {
-    row: u8,
-    column: u8,
-}
-
-#[account]
-#[derive(Default)]
-pub struct Game {
-    players: [Pubkey; 2],          // 64
-    turn: u8,                      // 1
-    board: [[Option<Sign>; 3]; 3], // 9 * (1 + 1) = 18
-    state: GameState,              // 32 + 1
-}
-
-impl Game {
-    const MAXIMUM_SIZE: usize = mem::size_of::<Game>() + 9;
-
-    pub fn is_active(&self) -> bool {
-        self.state == GameState::Active
-    }
-
-    fn current_player_index(&self) -> usize {
-        ((self.turn - 1) % 2) as usize
-    }
-
-    pub fn current_player(&self) -> Pubkey {
-        self.players[self.current_player_index()]
-    }
-
-    pub fn play(&mut self, tile: &Tile) -> Result<()> {
-        if !self.is_active() {
-            return Err(TicTacToeError::GameAlreadyOver.into());
-        }
-        match tile {
-            tile @ Tile {
-                row: 0..=2,
-                column: 0..=2,
-            } => match self.board[tile.row as usize][tile.column as usize] {
-                Some(_) => return Err(TicTacToeError::TileAlreadySet.into()),
-                None => {
-                    self.board[tile.row as usize][tile.column as usize] =
-                        Some(Sign::from_usize(self.current_player_index()).unwrap());
-                }
-            },
-            _ => return Err(TicTacToeError::TileOutOfBounds.into()),
-        }
-
-        self.update_state();
-
-        if GameState::Active == self.state {
-            self.turn += 1;
-        }
-
-        Ok(())
-    }
-
-    fn is_winning_trio(&self, trio: [(usize, usize); 3]) -> bool {
-        let [first, second, third] = trio;
-        self.board[first.0][first.1].is_some()
-            && self.board[first.0][first.1] == self.board[second.0][second.1]
-            && self.board[first.0][first.1] == self.board[third.0][third.1]
-    }
-
-    fn update_state(&mut self) {
-        for i in 0..=2 {
-            // three of the same in one row
-            if self.is_winning_trio([(i, 0), (i, 1), (i, 2)]) {
-                self.state = GameState::Won {
-                    winner: self.current_player(),
-                };
-                return;
-            }
-            // three of the same in one column
-            if self.is_winning_trio([(0, i), (1, i), (2, i)]) {
-                self.state = GameState::Won {
-                    winner: self.current_player(),
-                };
-                return;
-            }
-        }
-
-        // three of the same in one diagonal
-        if self.is_winning_trio([(0, 0), (1, 1), (2, 2)])
-            || self.is_winning_trio([(0, 2), (1, 1), (2, 0)])
-        {
-            self.state = GameState::Won {
-                winner: self.current_player(),
-            };
-            return;
-        }
-
-        // reaching this code means the game has not been won,
-        // so if there are unfilled tiles left, it's still active
-        for row in 0..=2 {
-            for column in 0..=2 {
-                if self.board[row][column].is_none() {
-                    return;
-                }
-            }
-        }
-
-        // game has not been won
-        // game has no more free tiles
-        // -> game ends in a tie
-        self.state = GameState::Tie;
-    }
-}
-
-#[derive(AnchorSerialize, AnchorDeserialize, Clone, PartialEq, Eq)]
-pub enum GameState {
-    Active,
-    Tie,
-    Won { winner: Pubkey },
-}
-
-impl Default for GameState {
-    fn default() -> Self {
-        Self::Active
-    }
-}
-
-#[derive(
-    AnchorSerialize, AnchorDeserialize, FromPrimitive, ToPrimitive, Copy, Clone, PartialEq, Eq,
-)]
-pub enum Sign {
-    X,
-    O,
-}
-
-#[derive(Accounts)]
-pub struct SetupGame<'info> {
-    #[account(init, payer = player_one, space = Game::MAXIMUM_SIZE + 8)]
-    pub game: Account<'info, Game>,
-    #[account(mut)]
-    pub player_one: Signer<'info>,
-    pub system_program: Program<'info, System>,
-}
-
-#[derive(Accounts)]
-pub struct Play<'info> {
-    #[account(mut)]
-    pub game: Account<'info, Game>,
-    pub player: Signer<'info>,
-}
diff --git a/programs/tic-tac-toe/programs/tic-tac-toe/src/state/game.rs b/programs/tic-tac-toe/programs/tic-tac-toe/src/state/game.rs
new file mode 100644
index 0000000..0c60b3d
--- /dev/null
+++ b/programs/tic-tac-toe/programs/tic-tac-toe/src/state/game.rs
@@ -0,0 +1,147 @@
+use crate::errors::TicTacToeError;
+use anchor_lang::prelude::*;
+use num_derive::*;
+use num_traits::*;
+use std::mem;
+
+#[derive(AnchorSerialize, AnchorDeserialize)]
+pub struct Tile {
+    row: u8,
+    column: u8,
+}
+
+#[account]
+#[derive(Default)]
+pub struct Game {
+    players: [Pubkey; 2],          // 64
+    turn: u8,                      // 1
+    board: [[Option<Sign>; 3]; 3], // 9 * (1 + 1) = 18
+    state: GameState,              // 32 + 1
+}
+
+impl Game {
+    pub const MAXIMUM_SIZE: usize = mem::size_of::<Game>() + 9;
+
+    pub fn start(&mut self) -> Result<()> {
+        if self.turn == 0 {
+            self.turn = 1;
+            Ok(())
+        } else {
+            err!(TicTacToeError::GameAlreadyStarted)
+        }
+    }
+
+    pub fn set_players(&mut self, players: [Pubkey; 2]) {
+        self.players = players;
+    }
+
+    pub fn is_active(&self) -> bool {
+        self.state == GameState::Active
+    }
+
+    fn current_player_index(&self) -> usize {
+        ((self.turn - 1) % 2) as usize
+    }
+
+    pub fn current_player(&self) -> Pubkey {
+        self.players[self.current_player_index()]
+    }
+
+    pub fn play(&mut self, tile: &Tile) -> Result<()> {
+        require!(self.is_active(), TicTacToeError::GameAlreadyOver);
+
+        match tile {
+            tile @ Tile {
+                row: 0..=2,
+                column: 0..=2,
+            } => match self.board[tile.row as usize][tile.column as usize] {
+                Some(_) => return Err(TicTacToeError::TileAlreadySet.into()),
+                None => {
+                    self.board[tile.row as usize][tile.column as usize] =
+                        Some(Sign::from_usize(self.current_player_index()).unwrap());
+                }
+            },
+            _ => return Err(TicTacToeError::TileOutOfBounds.into()),
+        }
+
+        self.update_state();
+
+        if GameState::Active == self.state {
+            self.turn += 1;
+        }
+
+        Ok(())
+    }
+
+    fn is_winning_trio(&self, trio: [(usize, usize); 3]) -> bool {
+        let [first, second, third] = trio;
+        self.board[first.0][first.1].is_some()
+            && self.board[first.0][first.1] == self.board[second.0][second.1]
+            && self.board[first.0][first.1] == self.board[third.0][third.1]
+    }
+
+    fn update_state(&mut self) {
+        for i in 0..=2 {
+            // three of the same in one row
+            if self.is_winning_trio([(i, 0), (i, 1), (i, 2)]) {
+                self.state = GameState::Won {
+                    winner: self.current_player(),
+                };
+                return;
+            }
+            // three of the same in one column
+            if self.is_winning_trio([(0, i), (1, i), (2, i)]) {
+                self.state = GameState::Won {
+                    winner: self.current_player(),
+                };
+                return;
+            }
+        }
+
+        // three of the same in one diagonal
+        if self.is_winning_trio([(0, 0), (1, 1), (2, 2)])
+            || self.is_winning_trio([(0, 2), (1, 1), (2, 0)])
+        {
+            self.state = GameState::Won {
+                winner: self.current_player(),
+            };
+            return;
+        }
+
+        // reaching this code means the game has not been won,
+        // so if there are unfilled tiles left, it's still active
+        for row in 0..=2 {
+            for column in 0..=2 {
+                if self.board[row][column].is_none() {
+                    return;
+                }
+            }
+        }
+
+        // game has not been won
+        // game has no more free tiles
+        // -> game ends in a tie
+        self.state = GameState::Tie;
+    }
+}
+
+#[derive(AnchorSerialize, AnchorDeserialize, Clone, PartialEq, Eq)]
+pub enum GameState {
+    Active,
+    Tie,
+    Won { winner: Pubkey },
+}
+
+impl Default for GameState {
+    fn default() -> Self {
+        Self::Active
+    }
+}
+
+#[derive(
+    AnchorSerialize, AnchorDeserialize, FromPrimitive, ToPrimitive, Copy, Clone, PartialEq, Eq,
+)]
+pub enum Sign {
+    X,
+    O,
+}
diff --git a/programs/tic-tac-toe/programs/tic-tac-toe/src/state/mod.rs b/programs/tic-tac-toe/programs/tic-tac-toe/src/state/mod.rs
new file mode 100644
index 0000000..f9da73e
--- /dev/null
+++ b/programs/tic-tac-toe/programs/tic-tac-toe/src/state/mod.rs
@@ -0,0 +1,3 @@
+pub use game::*;
+
+pub mod game;
diff --git a/src/chapter_3/milestone_project_tic-tac-toe.md b/src/chapter_3/milestone_project_tic-tac-toe.md
index 71fdab1..e0c1519 100644
--- a/src/chapter_3/milestone_project_tic-tac-toe.md
+++ b/src/chapter_3/milestone_project_tic-tac-toe.md
@@ -9,6 +9,8 @@ anchor init tic-tac-toe
 
 The program will have 2 instructions. First, we need to setup the game. We need to save who is playing it and create a board to play on. Then, the player take turns until there is a winner or a tie.
 
+We recommend to keep programs in a single `lib.rs` file until they get too big. We would keep this program in a single file too but have split up the reference implementation for demonstration purposes. Check out the section at the end of this chapter to learn how to split up a program into multiple files.
+
 ## Setting up the game
 
 ### State
@@ -212,9 +214,8 @@ impl Game {
     }
 
     pub fn play(&mut self, tile: &Tile) -> Result<()> {
-        if !self.is_active() {
-            return err!(TicTacToeError::GameAlreadyOver);
-        }
+        require!(self.is_active(), TicTacToeError::GameAlreadyOver);
+
         match tile {
             tile
             @ Tile {
@@ -496,4 +497,30 @@ Here is your deployment checklist 🚀
 
 There is more to deployments than this e.g. understanding how the BPFLoader works, how to manage keys, how to upgrade your programs and more. Keep reading to learn more!
 
+## Program directory organization
+> [Program Code](https://github.com/project-serum/anchor-book/tree/master/programs/tic-tac-toe)
+
+Eventually, some programs become too big to keep them in a single file and it makes sense to break them up. 
+
+Splitting a program into multiple files works almost the exact same way as splitting up a regular rust program, so if you haven't already, now is the time to read all about that in the [rust book](https://doc.rust-lang.org/book/ch07-00-managing-growing-projects-with-packages-crates-and-modules.html).
+
+We recommend the following directory structure (using the tic-tac-toe program as an example):
+```
+.
++-- lib.rs
++-- errors.rs
++-- instructions
+|   +-- play.rs
+|   +-- setup_game.rs
+|   +-- mod.rs
++-- state
+|   +-- game.rs
+|   +-- mod.rs
+```
+
+The crucial difference to a normal rust layout is the way that instructions have to be imported. The `lib.rs` file has to import each instruction module with a wildcard import (e.g. `use instructions::play::*;`). This has to be done because the `#[program]` macro depends on generated code inside each instruction file.
+
+To make the imports shorter you can re-export the instruction modules in the `mod.rs` file in the instructions directory with the `pub use` syntax and then import all instructions in the `lib.rs` file with `use instructions::*;`.
+
+
 Well done! You've finished the essentials section. You can now move on to the more advanced parts of Anchor.