diff --git a/src/ng/directive/ngTransclude.js b/src/ng/directive/ngTransclude.js
index c15b77cb4701..668f80335589 100644
--- a/src/ng/directive/ngTransclude.js
+++ b/src/ng/directive/ngTransclude.js
@@ -49,9 +49,14 @@
  *
  */
 var ngTranscludeDirective = ngDirective({
-  controller: ['$transclude', '$element', function($transclude, $element) {
-    $transclude(function(clone) {
-      $element.append(clone);
+  controller: ['$transclude', '$element', '$scope', function($transclude, $element, $scope) {
+    // use evalAsync so that we don't process transclusion before directives on the parent element even when the
+    // transclusion replaces the current element. (we can't use priority here because that applies only to compile fns
+    // and not controllers
+    $scope.$evalAsync(function() {
+      $transclude(function(clone) {
+        $element.append(clone);
+      });
     });
   }]
 });
diff --git a/test/ng/compileSpec.js b/test/ng/compileSpec.js
index 97a58c10f7be..c782187878d6 100755
--- a/test/ng/compileSpec.js
+++ b/test/ng/compileSpec.js
@@ -2331,6 +2331,95 @@ describe('$compile', function() {
         expect(asyncCtrlSpy).toHaveBeenCalledOnce();
       });
     });
+
+
+
+    it('should instantiate controllers in the parent->child order when transluction, templateUrl and replacement ' +
+        'are in the mix', function() {
+      // When a child controller is in the transclusion that replaces the parent element that has a directive with
+      // a controller, we should ensure that we first instantiate the parent and only then stuff that comes from the
+      // transclusion.
+      //
+      // The transclusion moves the child controller onto the same element as parent controller so both controllers are
+      // on the same level.
+
+      module(function() {
+        directive('parentDirective', function() {
+          return {
+            transclude: true,
+            replace: true,
+            templateUrl: 'parentDirective.html',
+            controller: function (log) { log('parentController'); }
+          };
+        });
+        directive('childDirective', function() {
+          return {
+            require: '^parentDirective',
+            templateUrl: 'childDirective.html',
+            controller : function(log) { log('childController'); }
+          };
+        });
+      });
+
+      inject(function($templateCache, log, $compile, $rootScope) {
+        $templateCache.put('parentDirective.html', '<div ng-transclude>parentTemplateText;</div>');
+        $templateCache.put('childDirective.html', '<span>childTemplateText;</span>');
+
+        element = $compile('<div parent-directive><div child-directive></div>childContentText;</div>')($rootScope);
+        $rootScope.$apply();
+        expect(log).toEqual('parentController; childController');
+        expect(element.text()).toBe('parentTemplateText;childTemplateText;childContentText;')
+      });
+    });
+
+
+    it('should instantiate controllers in the parent->child->baby order when nested transluction, templateUrl and ' +
+        'replacement are in the mix', function() {
+      // similar to the test above, except that we have one more layer of nesting and nested transclusion
+
+      module(function() {
+        directive('parentDirective', function() {
+          return {
+            transclude: true,
+            replace: true,
+            templateUrl: 'parentDirective.html',
+            controller: function (log) { log('parentController'); }
+          };
+        });
+        directive('childDirective', function() {
+          return {
+            require: '^parentDirective',
+            transclude: true,
+            replace: true,
+            templateUrl: 'childDirective.html',
+            controller : function(log) { log('childController'); }
+          };
+        });
+        directive('babyDirective', function() {
+          return {
+            require: '^childDirective',
+            templateUrl: 'babyDirective.html',
+            controller : function(log) { log('babyController'); }
+          };
+        });
+      });
+
+      inject(function($templateCache, log, $compile, $rootScope) {
+        $templateCache.put('parentDirective.html', '<div ng-transclude>parentTemplateText;</div>');
+        $templateCache.put('childDirective.html', '<span ng-transclude>childTemplateText;</span>');
+        $templateCache.put('babyDirective.html', '<span>babyTemplateText;</span>');
+
+        element = $compile('<div parent-directive>' +
+                             '<div child-directive>' +
+                               'childContentText;' +
+                               '<div baby-directive>babyContent;</div>' +
+                              '</div>' +
+                            '</div>')($rootScope);
+        $rootScope.$apply();
+        expect(log).toEqual('parentController; childController; babyController');
+        expect(element.text()).toBe('parentTemplateText;childTemplateText;childContentText;babyTemplateText;')
+      });
+    });
   });