diff --git a/lib/ansible/playbook/__init__.py b/lib/ansible/playbook/__init__.py
index 0368205d885..f26715dd93d 100644
--- a/lib/ansible/playbook/__init__.py
+++ b/lib/ansible/playbook/__init__.py
@@ -22,6 +22,7 @@ from ansible import utils
 from ansible import errors
 import ansible.callbacks
 import os
+import shlex
 import collections
 from play import Play
 
@@ -123,7 +124,7 @@ class PlayBook(object):
 
     # *****************************************************
 
-    def _load_playbook_from_file(self, path):
+    def _load_playbook_from_file(self, path, vars={}):
         '''
         run top level error checking on playbooks and allow them to include other playbooks.
         '''
@@ -135,21 +136,45 @@ class PlayBook(object):
         if type(playbook_data) != list:
             raise errors.AnsibleError("parse error: playbooks must be formatted as a YAML list")
 
+        basedir = os.path.dirname(path)
         for play in playbook_data:
             if type(play) != dict:
                 raise errors.AnsibleError("parse error: each play in a playbook must a YAML dictionary (hash), recieved: %s" % play)
             if 'include' in play:
-                if len(play.keys()) == 1:
-                    included_path = utils.path_dwim(self.basedir, play['include'])
-                    (plays, basedirs) = self._load_playbook_from_file(included_path)
-                    accumulated_plays.extend(plays)
-                    play_basedirs.extend(basedirs)
+                if len(play.keys()) <= 2:
+                    tokens = shlex.split(play['include'])
+
+                    items = ['']
+                    for k in play.keys():
+                        if not k.startswith("with_"):
+                            continue
+                        plugin_name = k[5:]
+                        if plugin_name not in utils.plugins.lookup_loader:
+                            raise errors.AnsibleError("cannot find lookup plugin named %s for usage in with_%s" % (plugin_name, plugin_name))
+                        terms = utils.template_ds(basedir, play[k], vars)
+                        items = utils.plugins.lookup_loader.get(plugin_name, basedir=basedir, runner=None).run(terms, inject=vars)
+                        break
+
+                    for item in items:
+                        incvars = vars.copy()
+                        incvars['item'] = item
+                        for t in tokens[1:]:
+                            (k,v) = t.split("=", 1)
+                            incvars[k] = utils.template_ds(basedir, v, incvars)
+                        included_path = utils.path_dwim(basedir, tokens[0])
+                        (plays, basedirs) = self._load_playbook_from_file(included_path, incvars)
+                        for p in plays:
+                            if 'vars' not in p:
+                                p['vars'] = {}
+                            p['vars'].update(incvars)
+                        accumulated_plays.extend(plays)
+                        play_basedirs.extend(basedirs)
 
                 else:
-                    raise errors.AnsibleError("parse error: top level includes cannot be used with other directives: %s" % play)
+                    raise errors.AnsibleError("parse error: playbook includes cannot be used with other directives: %s" % play)
             else:
                 accumulated_plays.append(play)
-                play_basedirs.append(os.path.dirname(path))
+                play_basedirs.append(basedir)
 
         return (accumulated_plays, play_basedirs)
 
diff --git a/lib/ansible/playbook/play.py b/lib/ansible/playbook/play.py
index 2aa7ff661ac..ebb8db26416 100644
--- a/lib/ansible/playbook/play.py
+++ b/lib/ansible/playbook/play.py
@@ -111,7 +111,7 @@ class Play(object):
                     plugin_name = k[5:]
                     if plugin_name not in utils.plugins.lookup_loader:
                         raise errors.AnsibleError("cannot find lookup plugin named %s for usage in with_%s" % (plugin_name, plugin_name))
-                    terms = utils.varReplaceWithItems(self.basedir, x[k], task_vars)
+                    terms = utils.template_ds(self.basedir, x[k], task_vars)
                     items = utils.plugins.lookup_loader.get(plugin_name, basedir=self.basedir, runner=None).run(terms, inject=task_vars)
 
                 for item in items:
@@ -119,7 +119,7 @@ class Play(object):
                     mv['item'] = item
                     for t in tokens[1:]:
                         (k,v) = t.split("=", 1)
-                        mv[k] = utils.varReplaceWithItems(self.basedir, v, mv)
+                        mv[k] = utils.template_ds(self.basedir, v, mv)
                     include_file = utils.template(self.basedir, tokens[0], mv)
                     data = utils.parse_yaml_from_file(utils.path_dwim(self.basedir, include_file))
                     for y in data:
diff --git a/lib/ansible/runner/__init__.py b/lib/ansible/runner/__init__.py
index dbd0eaff9ca..2a400966ad1 100644
--- a/lib/ansible/runner/__init__.py
+++ b/lib/ansible/runner/__init__.py
@@ -273,7 +273,7 @@ class Runner(object):
         items_plugin = self.module_vars.get('items_lookup_plugin', None)
         if items_plugin is not None and items_plugin in utils.plugins.lookup_loader:
             items_terms = self.module_vars.get('items_lookup_terms', '')
-            items_terms = utils.varReplaceWithItems(self.basedir, items_terms, inject)
+            items_terms = utils.template_ds(self.basedir, items_terms, inject)
             items = utils.plugins.lookup_loader.get(items_plugin, runner=self, basedir=self.basedir).run(items_terms, inject=inject)
             if type(items) != list:
                 raise errors.AnsibleError("lookup plugins have to return a list: %r" % items)
diff --git a/lib/ansible/utils/template.py b/lib/ansible/utils/template.py
index 30eca1324b6..256398dd075 100644
--- a/lib/ansible/utils/template.py
+++ b/lib/ansible/utils/template.py
@@ -183,8 +183,8 @@ def _varReplaceLookups(basedir, raw, vars):
 
     return ''.join(done)
 
-def varReplaceWithItems(basedir, varname, vars):
-    ''' helper function used by with_items '''
+def template_ds(basedir, varname, vars):
+    ''' templates a data structure by traversing it and substituting for other data structures '''
 
     if isinstance(varname, basestring):
         m = _varFind(varname, vars)
@@ -192,17 +192,17 @@ def varReplaceWithItems(basedir, varname, vars):
             return varname
         if m['start'] == 0 and m['end'] == len(varname):
             if m['replacement'] is not None:
-                return varReplaceWithItems(basedir, m['replacement'], vars)
+                return template_ds(basedir, m['replacement'], vars)
             else:
                 return varname
         else:
             return template(basedir, varname, vars)
     elif isinstance(varname, (list, tuple)):
-        return [varReplaceWithItems(basedir, v, vars) for v in varname]
+        return [template_ds(basedir, v, vars) for v in varname]
     elif isinstance(varname, dict):
         d = {}
         for (k, v) in varname.iteritems():
-            d[k] = varReplaceWithItems(basedir, v, vars)
+            d[k] = template_ds(basedir, v, vars)
         return d
     else:
         return varname
diff --git a/test/TestPlayBook.py b/test/TestPlayBook.py
index 9627d86c984..55e318cb66f 100644
--- a/test/TestPlayBook.py
+++ b/test/TestPlayBook.py
@@ -204,6 +204,27 @@ class TestPlaybook(unittest.TestCase):
 
        assert len(EVENTS) == 44
 
+   def test_includes(self):
+       pb = os.path.join(self.test_dir, 'playbook-includer.yml')
+       actual = self._run(pb)
+
+       # if different, this will output to screen
+       print "**ACTUAL**"
+       print utils.jsonify(actual, format=True)
+       expected =  {
+           "localhost": {
+               "changed": 0,
+               "failures": 0,
+               "ok": 5,
+               "skipped": 0,
+               "unreachable": 0
+           }   
+       }   
+       print "**EXPECTED**"
+       print utils.jsonify(expected, format=True)
+
+       assert utils.jsonify(expected, format=True) == utils.jsonify(actual,format=True)
+
    def test_playbook_vars(self): 
        test_callbacks = TestCallbacks()
        playbook = ansible.playbook.PlayBook(
diff --git a/test/TestUtils.py b/test/TestUtils.py
index 33c04186231..b8a2bfa6efc 100644
--- a/test/TestUtils.py
+++ b/test/TestUtils.py
@@ -286,9 +286,9 @@ class TestUtils(unittest.TestCase):
         assert res == u'hello world world'
 
     #####################################
-    ### varReplaceWithItems function tests
+    ### template_ds function tests
 
-    def test_varReplaceWithItems_basic(self):
+    def test_template_ds_basic(self):
         vars = {
             'data': {
                 'var': [
@@ -313,19 +313,19 @@ class TestUtils(unittest.TestCase):
         }
 
         template = '${data.var}'
-        res = ansible.utils.varReplaceWithItems(None, template, vars)
+        res = ansible.utils.template_ds(None, template, vars)
         assert sorted(res) == sorted(vars['data']['var'])
 
         template = '${data.types}'
-        res = ansible.utils.varReplaceWithItems(None, template, vars)
+        res = ansible.utils.template_ds(None, template, vars)
         assert sorted(res) == sorted(vars['data']['types'])
 
         template = '${data.alphas}'
-        res = ansible.utils.varReplaceWithItems(None, template, vars)
+        res = ansible.utils.template_ds(None, template, vars)
         assert sorted(res) == sorted(vars['alphas'])
 
         template = '${data.nonexisting}'
-        res = ansible.utils.varReplaceWithItems(None, template, vars)
+        res = ansible.utils.template_ds(None, template, vars)
         assert res == template
 
     #####################################
diff --git a/test/playbook-included.yml b/test/playbook-included.yml
new file mode 100644
index 00000000000..4f96e30a4a8
--- /dev/null
+++ b/test/playbook-included.yml
@@ -0,0 +1,5 @@
+---
+- hosts: all
+  gather_facts: False
+  tasks:
+  - action: debug msg="$variable"
diff --git a/test/playbook-includer.yml b/test/playbook-includer.yml
new file mode 100644
index 00000000000..a3804211fee
--- /dev/null
+++ b/test/playbook-includer.yml
@@ -0,0 +1,8 @@
+---
+- include: playbook-included.yml variable=foobar
+- include: playbook-included.yml variable=foofoo
+- include: playbook-included.yml variable=$item
+  with_items:
+  - foo
+  - bar
+  - baz