diff --git a/src/ng/compile.js b/src/ng/compile.js
index 13f8ae7ef62b..18adc2c9eff7 100644
--- a/src/ng/compile.js
+++ b/src/ng/compile.js
@@ -938,7 +938,7 @@ function $CompileProvider($provide) {
           }
 
           directives.unshift(derivedSyncDirective);
-          afterTemplateNodeLinkFn = applyDirectivesToNode(directives, $compileNode, tAttrs, childTranscludeFn);
+          afterTemplateNodeLinkFn = applyDirectivesToNode(directives, compileNode, tAttrs, childTranscludeFn);
           afterTemplateChildLinkFn = compileNodes($compileNode.contents(), childTranscludeFn);
 
 
diff --git a/test/ng/compileSpec.js b/test/ng/compileSpec.js
index b4ec029215ae..a7707cf9ee30 100644
--- a/test/ng/compileSpec.js
+++ b/test/ng/compileSpec.js
@@ -1538,6 +1538,25 @@ describe('$compile', function() {
         expect(element.text()).toEqual('WORKS');
       });
     });
+
+    it('should support $observe inside link function on directive object', function() {
+      module(function() {
+        directive('testLink', valueFn({
+          templateUrl: 'test-link.html',
+          link: function(scope, element, attrs) {
+            attrs.$observe( 'testLink', function ( val ) {
+              scope.testAttr = val;
+            });
+          }
+        }));
+      });
+      inject(function($compile, $rootScope, $templateCache) {
+        $templateCache.put('test-link.html', '{{testAttr}}' );
+        element = $compile('<div test-link="{{1+2}}"></div>')($rootScope);
+        $rootScope.$apply();
+        expect(element.text()).toBe('3');
+      });
+    });
   });