diff --git a/modules/angular2/src/core/compiler/element_injector.js b/modules/angular2/src/core/compiler/element_injector.js
index b154e5148e..d32980294e 100644
--- a/modules/angular2/src/core/compiler/element_injector.js
+++ b/modules/angular2/src/core/compiler/element_injector.js
@@ -211,10 +211,22 @@ export class ProtoElementInjector  {
   index:int;
   view:View;
   distanceToParent:number;
+
+  /** Whether the element is exported as $implicit. */
+  exportElement:boolean;
+
+  /** Whether the component instance is exported as $implicit. */
+  exportComponent:boolean;
+
+  /** The variable name that will be set to $implicit for the element. */
+  exportImplicitName:string;
+
   constructor(parent:ProtoElementInjector, index:int, bindings:List, firstBindingIsComponent:boolean = false, distanceToParent:number = 0) {
     this.parent = parent;
     this.index = index;
     this.distanceToParent = distanceToParent;
+    this.exportComponent = false;
+    this.exportElement = false;
 
     this._binding0IsComponent = firstBindingIsComponent;
     this._binding0 = null; this._keyId0 = null;
@@ -405,6 +417,11 @@ export class ElementInjector extends TreeNode {
     return this._preBuiltObjects.element.domElement === el;
   }
 
+  /** Gets the NgElement associated with this ElementInjector */
+  getNgElement() {
+    return this._preBuiltObjects.element;
+  }
+
   getComponent() {
     if (this._proto._binding0IsComponent) {
       return this._obj0;
@@ -603,6 +620,21 @@ export class ElementInjector extends TreeNode {
   hasEventEmitter(eventName: string) {
     return this._proto.hasEventEmitter(eventName);
   }
+
+  /** Gets whether this element is exporting a component instance as $implicit. */
+  isExportingComponent() {
+    return this._proto.exportComponent;
+  }
+
+  /** Gets whether this element is exporting its element as $implicit. */
+  isExportingElement() {
+    return this._proto.exportElement;
+  }
+
+  /** Get the name to which this element's $implicit is to be assigned. */
+  getExportImplicitName() {
+    return this._proto.exportImplicitName;
+  }
 }
 
 class OutOfBoundsAccess extends Error {
diff --git a/modules/angular2/src/core/compiler/pipeline/compile_element.js b/modules/angular2/src/core/compiler/pipeline/compile_element.js
index 597ca1e05a..c8d6352c2b 100644
--- a/modules/angular2/src/core/compiler/pipeline/compile_element.js
+++ b/modules/angular2/src/core/compiler/pipeline/compile_element.js
@@ -106,11 +106,17 @@ export class CompileElement {
     MapWrapper.set(this.propertyBindings, property, expression);
   }
 
-  addVariableBinding(directiveName:string, templateName:string) {
+  addVariableBinding(variableName:string, variableValue:string) {
     if (isBlank(this.variableBindings)) {
       this.variableBindings = MapWrapper.create();
     }
-    MapWrapper.set(this.variableBindings, templateName, directiveName);
+
+    // Store the variable map from value to variable, reflecting how it will be used later by
+    // View. When a local is set to the view, a lookup for the variable name will take place keyed
+    // by the "value", or exported identifier. For example, ng-repeat sets a view local of "index".
+    // When this occurs, a lookup keyed by "index" must occur to find if there is a var referencing
+    // it.
+    MapWrapper.set(this.variableBindings, variableValue, variableName);
   }
 
   addEventBinding(eventName:string, expression:AST) {
diff --git a/modules/angular2/src/core/compiler/pipeline/property_binding_parser.js b/modules/angular2/src/core/compiler/pipeline/property_binding_parser.js
index d6103944c0..07063ff6ae 100644
--- a/modules/angular2/src/core/compiler/pipeline/property_binding_parser.js
+++ b/modules/angular2/src/core/compiler/pipeline/property_binding_parser.js
@@ -9,7 +9,16 @@ import {CompileElement} from './compile_element';
 import {CompileControl} from './compile_control';
 
 // TODO(tbosch): Cannot make this const/final right now because of the transpiler...
-var BIND_NAME_REGEXP = RegExpWrapper.create('^(?:(?:(bind)|(var)|(on))-(.+))|\\[([^\\]]+)\\]|\\(([^\\)]+)\\)');
+// Group 1 = "bind"
+// Group 2 = "var"
+// Group 3 = "on"
+// Group 4 = the identifier after "bind", "var", or "on"
+// Group 5 = idenitifer inside square braces
+// Group 6 = identifier inside parenthesis
+// Group 7 = "#"
+// Group 8 = identifier after "#"
+var BIND_NAME_REGEXP = RegExpWrapper.create(
+    '^(?:(?:(bind)|(var)|(on))-(.+))|\\[([^\\]]+)\\]|\\(([^\\)]+)\\)|(#)(.+)');
 
 /**
  * Parses the property bindings on a single element.
@@ -35,14 +44,12 @@ export class PropertyBindingParser extends CompileStep {
         if (isPresent(bindParts[1])) {
           // match: bind-prop
           current.addPropertyBinding(bindParts[4], this._parseBinding(attrValue));
-        } else if (isPresent(bindParts[2])) {
-          // match: let-prop
-          // Note: We assume that the ViewSplitter already did its work, i.e. template directive should
-          // only be present on <template> elements any more!
-          if (!(current.element instanceof TemplateElement)) {
-            throw new BaseException('var-* is only allowed on <template> elements!');
-          }
-          current.addVariableBinding(bindParts[4], attrValue);
+        } else if (isPresent(bindParts[2]) || isPresent(bindParts[7])) {
+          // match: var-name / var-name="iden" / #name / #name="iden"
+          var identifier = (isPresent(bindParts[4]) && bindParts[4] !== '') ?
+              bindParts[4] : bindParts[8];
+          var value = attrValue == '' ? '\$implicit' : attrValue;
+          current.addVariableBinding(identifier, value);
         } else if (isPresent(bindParts[3])) {
           // match: on-prop
           current.addEventBinding(bindParts[4], this._parseAction(attrValue));
diff --git a/modules/angular2/src/core/compiler/pipeline/proto_element_injector_builder.js b/modules/angular2/src/core/compiler/pipeline/proto_element_injector_builder.js
index 6547774428..0799b71dea 100644
--- a/modules/angular2/src/core/compiler/pipeline/proto_element_injector_builder.js
+++ b/modules/angular2/src/core/compiler/pipeline/proto_element_injector_builder.js
@@ -1,5 +1,5 @@
 import {isPresent, isBlank} from 'angular2/src/facade/lang';
-import {ListWrapper} from 'angular2/src/facade/collection';
+import {ListWrapper, MapWrapper} from 'angular2/src/facade/collection';
 
 import {Key} from 'angular2/di';
 import {ProtoElementInjector, ComponentKeyMetaData, DirectiveBinding} from '../element_injector';
@@ -39,7 +39,10 @@ export class ProtoElementInjectorBuilder extends CompileStep {
     // but after the directives as we rely on that order
     // in the element_binder_builder.
 
-    if (injectorBindings.length > 0) {
+    // Create a protoElementInjector for any element that either has bindings *or* has one
+    // or more var- defined. Elements with a var- defined need a their own element injector
+    // so that, when hydrating, $implicit can be set to the element.
+    if (injectorBindings.length > 0 || isPresent(current.variableBindings)) {
       var protoView = current.inheritedProtoView;
       var hasComponent = isPresent(current.componentDirective);
 
@@ -49,6 +52,18 @@ export class ProtoElementInjectorBuilder extends CompileStep {
       );
       current.distanceToParentInjector = 0;
 
+      // Template directives are treated differently than other element with var- definitions.
+      if (isPresent(current.variableBindings) && !isPresent(current.templateDirective)) {
+        current.inheritedProtoElementInjector.exportComponent = hasComponent;
+        current.inheritedProtoElementInjector.exportElement = !hasComponent;
+
+        // experiment
+        var exportImplicitName = MapWrapper.get(current.variableBindings, '\$implicit');
+        if (isPresent(exportImplicitName)) {
+          current.inheritedProtoElementInjector.exportImplicitName = exportImplicitName;
+        }
+      }
+
     } else {
       current.inheritedProtoElementInjector = parentProtoElementInjector;
       current.distanceToParentInjector = distanceToParentInjector;
diff --git a/modules/angular2/src/core/compiler/pipeline/proto_view_builder.js b/modules/angular2/src/core/compiler/pipeline/proto_view_builder.js
index b7e797b7e7..2316ec2aa8 100644
--- a/modules/angular2/src/core/compiler/pipeline/proto_view_builder.js
+++ b/modules/angular2/src/core/compiler/pipeline/proto_view_builder.js
@@ -40,6 +40,10 @@ export class ProtoViewBuilder extends CompileStep {
           throw new BaseException('Only one nested view per element is allowed');
         }
         parent.inheritedElementBinder.nestedProtoView = inheritedProtoView;
+
+        // When current is a view root, the variable bindings are set to the *nested* proto view.
+        // The root view conceptually signifies a new "block scope" (the nested view), to which
+        // the variables are bound.
         if (isPresent(parent.variableBindings)) {
           MapWrapper.forEach(parent.variableBindings, (mappedName, varName) => {
             inheritedProtoView.bindVariable(varName, mappedName);
@@ -49,6 +53,17 @@ export class ProtoViewBuilder extends CompileStep {
     } else if (isPresent(parent)) {
       inheritedProtoView = parent.inheritedProtoView;
     }
+
+    // The view's contextWithLocals needs to have a full set of variable names at construction time
+    // in order to prevent new variables from being set later in the lifecycle. Since we don't want
+    // to actually create variable bindings for the $implicit bindings, add to the
+    // protoContextLocals manually.
+    if (isPresent(current.variableBindings)) {
+      MapWrapper.forEach(current.variableBindings, (mappedName, varName) => {
+        MapWrapper.set(inheritedProtoView.protoContextLocals, mappedName, null);
+      });
+    }
+
     current.inheritedProtoView = inheritedProtoView;
   }
 }
diff --git a/modules/angular2/src/core/compiler/view.js b/modules/angular2/src/core/compiler/view.js
index 6eac60136f..8056f3ef60 100644
--- a/modules/angular2/src/core/compiler/view.js
+++ b/modules/angular2/src/core/compiler/view.js
@@ -150,6 +150,16 @@ export class View {
       var elementInjector = this.elementInjectors[i];
       if (isPresent(elementInjector)) {
         elementInjector.instantiateDirectives(appInjector, shadowDomAppInjector, this.preBuiltObjects[i]);
+
+        // The exporting of $implicit is a special case. Since multiple elements will all export
+        // the different values as $implicit, directly assign $implicit bindings to the variable
+        // name.
+        var exportImplicitName = elementInjector.getExportImplicitName();
+        if (elementInjector.isExportingComponent()) {
+          this.context.set(exportImplicitName, elementInjector.getComponent());
+        } else if (elementInjector.isExportingElement()) {
+          this.context.set(exportImplicitName, elementInjector.getNgElement().domElement);
+        }
       }
 
       if (isPresent(componentDirective)) {
diff --git a/modules/angular2/test/core/compiler/integration_spec.js b/modules/angular2/test/core/compiler/integration_spec.js
index 0b5c752f41..f6fd816463 100644
--- a/modules/angular2/test/core/compiler/integration_spec.js
+++ b/modules/angular2/test/core/compiler/integration_spec.js
@@ -133,6 +133,62 @@ export function main() {
           done();
         });
       });
+
+      it('should assign the component instance to a var-', (done) => {
+        compiler.compile(MyComp, el('<p><child-cmp var-alice></child-cmp></p>')).then((pv) => {
+          createView(pv);
+
+          expect(view.contextWithLocals).not.toBe(null);
+          expect(view.contextWithLocals.get('alice')).toBeAnInstanceOf(ChildComp);
+
+          done();
+        })
+      });
+
+      it('should assign two component instances each with a var-', (done) => {
+        var element = el('<p><child-cmp var-alice></child-cmp><child-cmp var-bob></p>');
+
+        compiler.compile(MyComp, element).then((pv) => {
+          createView(pv);
+
+          expect(view.contextWithLocals).not.toBe(null);
+          expect(view.contextWithLocals.get('alice')).toBeAnInstanceOf(ChildComp);
+          expect(view.contextWithLocals.get('bob')).toBeAnInstanceOf(ChildComp);
+          expect(view.contextWithLocals.get('alice')).not.toBe(view.contextWithLocals.get('bob'));
+
+          done();
+        })
+      });
+
+      it('should assign the component instance to a var- with shorthand syntax', (done) => {
+        compiler.compile(MyComp, el('<child-cmp #alice></child-cmp>')).then((pv) => {
+          createView(pv);
+
+          expect(view.contextWithLocals).not.toBe(null);
+          expect(view.contextWithLocals.get('alice')).toBeAnInstanceOf(ChildComp);
+
+          done();
+        })
+      });
+
+      it('should assign the element instance to a user-defined variable', (done) => {
+        // How is this supposed to work?
+        var element = el('<p></p>');
+        var div = el('<div var-alice></div>');
+        DOM.appendChild(div, el('<i>Hello</i>'));
+        DOM.appendChild(element, div);
+
+        compiler.compile(MyComp, element).then((pv) => {
+          createView(pv);
+          expect(view.contextWithLocals).not.toBe(null);
+
+          var value = view.contextWithLocals.get('alice');
+          expect(value).not.toBe(null);
+          expect(value.tagName).toEqual('DIV');
+
+          done();
+        })
+      });
     });
   });
 }
diff --git a/modules/angular2/test/core/compiler/pipeline/property_binding_parser_spec.js b/modules/angular2/test/core/compiler/pipeline/property_binding_parser_spec.js
index 42eb5c369d..f51a0396b6 100644
--- a/modules/angular2/test/core/compiler/pipeline/property_binding_parser_spec.js
+++ b/modules/angular2/test/core/compiler/pipeline/property_binding_parser_spec.js
@@ -34,10 +34,24 @@ export function main() {
       expect(MapWrapper.get(results[0].variableBindings, 'b')).toEqual('a');
     });
 
-    it('should not allow var- syntax on non template elements', () => {
-      expect( () => {
-        createPipeline().process(el('<div var-a="b"></div>'))
-      }).toThrowError('var-* is only allowed on <template> elements!');
+    it('should store variable binding for a non-template element', () => {
+      var results = createPipeline().process(el('<p var-george="washington"></p>'));
+      expect(MapWrapper.get(results[0].variableBindings, 'washington')).toEqual('george');
+    });
+
+    it('should store variable binding for a non-template element using shorthand syntax', () => {
+      var results = createPipeline().process(el('<p #george="washington"></p>'));
+      expect(MapWrapper.get(results[0].variableBindings, 'washington')).toEqual('george');
+    });
+
+    it('should store a variable binding with an implicit value', () => {
+      var results = createPipeline().process(el('<p var-george></p>'));
+      expect(MapWrapper.get(results[0].variableBindings, '\$implicit')).toEqual('george');
+    });
+
+    it('should store a variable binding with an implicit value using shorthand syntax', () => {
+      var results = createPipeline().process(el('<p #george></p>'));
+      expect(MapWrapper.get(results[0].variableBindings, '\$implicit')).toEqual('george');
     });
 
     it('should detect () syntax', () => {
diff --git a/modules/angular2/test/core/compiler/pipeline/proto_element_injector_builder_spec.js b/modules/angular2/test/core/compiler/pipeline/proto_element_injector_builder_spec.js
index fe116fd689..99458447eb 100644
--- a/modules/angular2/test/core/compiler/pipeline/proto_element_injector_builder_spec.js
+++ b/modules/angular2/test/core/compiler/pipeline/proto_element_injector_builder_spec.js
@@ -1,7 +1,7 @@
 import {describe, beforeEach, it, expect, iit, ddescribe, el} from 'angular2/test_lib';
 import {isPresent, isBlank} from 'angular2/src/facade/lang';
 import {DOM} from 'angular2/src/facade/dom';
-import {List, ListWrapper} from 'angular2/src/facade/collection';
+import {List, ListWrapper, MapWrapper} from 'angular2/src/facade/collection';
 
 import {ProtoElementInjectorBuilder} from 'angular2/src/core/compiler/pipeline/proto_element_injector_builder';
 import {CompilePipeline} from 'angular2/src/core/compiler/pipeline/compile_pipeline';
@@ -21,6 +21,11 @@ export function main() {
       protoView = new ProtoView(null, null, null);
     });
 
+    // Create consts for an elements with a var- so that we can fake parsing the var into
+    // the CompileElement's variableBindings without actually doing any parsing.
+    var ELEMENT_WITH_VAR = el('<div var-name></div>');
+    var DIRECTIVE_ELEMENT_WITH_VAR = el('<div var-name directives></div>');
+
     function createPipeline(directives = null) {
       if (isBlank(directives)) {
         directives = [];
@@ -30,12 +35,20 @@ export function main() {
         if (isPresent(current.element.getAttribute('viewroot'))) {
           current.isViewRoot = true;
         }
+
         if (isPresent(current.element.getAttribute('directives'))) {
           for (var i=0; i<directives.length; i++) {
             var dirMetadata = reader.read(directives[i]);
             current.addDirective(dirMetadata);
           }
         }
+
+        // Check only for the hard-coded var- attribute from ELEMENT_WITH_VAR test element.
+        if (isPresent(current.element.getAttribute('var-name'))) {
+          current.variableBindings = MapWrapper.create();
+          MapWrapper.set(current.variableBindings, '\$implicit', 'name');
+        }
+
         current.inheritedProtoView = protoView;
       }), protoElementInjectorBuilder]);
     }
@@ -44,11 +57,16 @@ export function main() {
       return protoElementInjectorBuilder.findArgsFor(protoElementInjector);
     }
 
-    it('should not create a ProtoElementInjector for elements without directives', () => {
+    it('should not create a ProtoElementInjector for elements without directives or vars', () => {
       var results = createPipeline().process(el('<div></div>'));
       expect(results[0].inheritedProtoElementInjector).toBe(null);
     });
 
+    it('should create a ProtoElementInjector for elements with a variable binding', () => {
+      var results = createPipeline().process(ELEMENT_WITH_VAR);
+      expect(results[0].inheritedProtoElementInjector).toBeAnInstanceOf(ProtoElementInjector);
+    });
+
     it('should create a ProtoElementInjector for elements directives', () => {
       var directives = [SomeComponentDirective, SomeTemplateDirective, SomeDecoratorDirective];
       var results = createPipeline(directives).process(el('<div directives></div>'));
@@ -57,7 +75,22 @@ export function main() {
       expect(boundDirectives).toEqual(directives);
     });
 
-    it('should mark ProtoElementInjector for elements with component directives and use the ComponentDirective as first binding', () => {
+    it('should flag the ProtoElementInjector for exporting the component instance when a' +
+        'component has a var- declaration', () => {
+      var results = createPipeline([SomeComponentDirective]).process(DIRECTIVE_ELEMENT_WITH_VAR);
+      expect(results[0].inheritedProtoElementInjector.exportComponent).toBe(true);
+      expect(results[0].inheritedProtoElementInjector.exportElement).toBe(false);
+    });
+
+    it('should flag the ProtoElementInjector for exporting the element when a' +
+        'non-component element has a var- declaration', () => {
+      var results = createPipeline([SomeComponentDirective]).process(ELEMENT_WITH_VAR);
+      expect(results[0].inheritedProtoElementInjector.exportComponent).toBe(false);
+      expect(results[0].inheritedProtoElementInjector.exportElement).toBe(true);
+    });
+
+    it('should mark ProtoElementInjector for elements with component directives and use the ' +
+        'ComponentDirective as first binding', () => {
       var directives = [SomeDecoratorDirective, SomeComponentDirective];
       var results = createPipeline(directives).process(el('<div directives></div>'));
       var creationArgs = getCreationArgs(results[0].inheritedProtoElementInjector);
diff --git a/modules/angular2/test/core/compiler/pipeline/proto_view_builder_spec.js b/modules/angular2/test/core/compiler/pipeline/proto_view_builder_spec.js
index 617e87a147..67f7d4bc91 100644
--- a/modules/angular2/test/core/compiler/pipeline/proto_view_builder_spec.js
+++ b/modules/angular2/test/core/compiler/pipeline/proto_view_builder_spec.js
@@ -62,6 +62,21 @@ export function main() {
       }));
     });
 
+    it('should mark variables in the proto view context locals', () => {
+      var element = el('<div viewroot><p var-binding></p></div>');
+
+      var results = createPipeline({
+        'var1': 'map1',
+        'var2': 'map2'
+      }).process(element);
+
+      var protoView = results[0].inheritedProtoView;
+      expect(protoView.protoContextLocals).toEqual(MapWrapper.createFromStringMap({
+        'map2': null,
+        'map1': null
+      }));
+    });
+
     describe('errors', () => {
 
       it('should not allow multiple nested ProtoViews for the same parent element', () => {
@@ -84,4 +99,4 @@ class MockStep extends CompileStep {
   process(parent:CompileElement, current:CompileElement, control:CompileControl) {
     this.processClosure(parent, current, control);
   }
-}
\ No newline at end of file
+}