diff --git a/src/manipulation.js b/src/manipulation.js
index 37a8cfdf..8c188c2d 100644
--- a/src/manipulation.js
+++ b/src/manipulation.js
@@ -233,6 +233,12 @@ jQuery.fn.extend({
 			// this can help fix replacing a parent with child elements
 			if ( !jQuery.isFunction( value ) ) {
 				value = jQuery( value ).detach();
+
+			} else {
+				return this.each(function(i) {
+					var self = jQuery(this), old = self.html();
+					self.replaceWith( value.call( this, i, old ) );
+				});
 			}
 
 			return this.each(function() {
diff --git a/test/unit/manipulation.js b/test/unit/manipulation.js
index bbf9a3a2..168c17c9 100644
--- a/test/unit/manipulation.js
+++ b/test/unit/manipulation.js
@@ -720,6 +720,16 @@ test("replaceWith(String|Element|Array<Element>|jQuery)", function() {
 
 test("replaceWith(Function)", function() {
 	testReplaceWith(functionReturningObj);
+
+	expect(16);
+
+	var y = jQuery("#yahoo")[0];
+
+	jQuery(y).replaceWith(function(){
+		equals( this, y, "Make sure the context is coming in correctly." );
+	});
+
+	reset();
 })
 
 test("replaceAll(String|Element|Array<Element>|jQuery)", function() {