diff --git a/rxjava-core/src/main/java/rx/subjects/ReplaySubject.java b/rxjava-core/src/main/java/rx/subjects/ReplaySubject.java
index c167ef17d1..3fb872b875 100644
--- a/rxjava-core/src/main/java/rx/subjects/ReplaySubject.java
+++ b/rxjava-core/src/main/java/rx/subjects/ReplaySubject.java
@@ -25,11 +25,15 @@
 import rx.Observable;
 import rx.Observable.OnSubscribe;
 import rx.Observer;
-import rx.subjects.SubjectSubscriptionManager.SubjectObserver;
-import rx.util.functions.Action1;
+import rx.subjects.SubjectSubscriptionManager.*;
+import rx.util.functions.*;
+
+import java.util.*;
+import java.util.concurrent.*;
+import java.util.concurrent.atomic.*;
 
 /**
- * Subject that retains all events and will replay them to an {@link Observer} that subscribes.
+ * Subject that retains events (unlimited or with given replay capacity) and will replay them to an {@link Observer} that subscribes.
  * <p>
  * <img width="640" src="https://raw.github.com/wiki/Netflix/RxJava/images/rx-operators/S.ReplaySubject.png">
  * <p>
@@ -52,13 +56,24 @@
  * @param <T>
  */
 public final class ReplaySubject<T> extends Subject<T, T> {
+    private static final Integer ReplaySubjectUnlimitedCapacity = Integer.MAX_VALUE;
+
+    /**
+     * @param <T>
+     * @return a new replay subject with the unlimited capacity.
+     */
     public static <T> ReplaySubject<T> create() {
-        return create(16);
+        return create(ReplaySubjectUnlimitedCapacity);
     }
 
-    public static <T> ReplaySubject<T> create(int initialCapacity) {
+    /**
+     * @param capacity Maximum element count of the replay buffer
+     * @param <T>
+     * @return a new replay subject with the given capacity.
+     */
+    public static <T> ReplaySubject<T> create(int capacity) {
         final SubjectSubscriptionManager<T> subscriptionManager = new SubjectSubscriptionManager<T>();
-        final ReplayState<T> state = new ReplayState<T>(initialCapacity);
+        final ReplayState<T> state = new ReplayState<T>(capacity);
 
         OnSubscribe<T> onSubscribe = subscriptionManager.getOnSubscribeFunc(
                 /**
@@ -71,11 +86,12 @@ public static <T> ReplaySubject<T> create(int initialCapacity) {
                 new Action1<SubjectObserver<? super T>>() {
 
                     @Override
-                    public void call(SubjectObserver<? super T> o) {
+                    public void call(SubjectSubscriptionManager.SubjectObserver<? super T> o) {
                         // replay history for this observer using the subscribing thread
                         int lastIndex = replayObserverFromIndex(state.history, 0, o);
 
                         // now that it is caught up add to observers
+                        o.caughtUp = true;
                         state.replayState.put(o, lastIndex);
                     }
                 },
@@ -99,9 +115,8 @@ private static class ReplayState<T> {
         final History<T> history;
         // each Observer is tracked here for what events they have received
         final ConcurrentHashMap<Observer<? super T>, Integer> replayState;
-
-        public ReplayState(int initialCapacity) {
-            history = new History<T>(initialCapacity);
+        public ReplayState(int capacity) {
+            history = new History<T>(capacity);
             replayState = new ConcurrentHashMap<Observer<? super T>, Integer>();
         }
     }
@@ -216,23 +231,34 @@ private static class History<T> {
         private final AtomicInteger index;
         private final ArrayList<T> list;
         private final AtomicReference<Notification<T>> terminalValue;
-
-        public History(int initialCapacity) {
+        private final int capacity;
+        public History(int capacity) {
+            this.capacity = capacity;
             index = new AtomicInteger(0);
-            list = new ArrayList<T>(initialCapacity);
+            list = this.capacity == ReplaySubjectUnlimitedCapacity ? new ArrayList<T>(16) : new ArrayList<T>(capacity);
             terminalValue = new AtomicReference<Notification<T>>();
         }
 
         public boolean next(T n) {
             if (terminalValue.get() == null) {
                 list.add(n);
-                index.getAndIncrement();
+                trim();
                 return true;
             } else {
                 return false;
             }
         }
 
+        private void trim() {
+            if (this.capacity != ReplaySubjectUnlimitedCapacity && list.size() > this.capacity ) {
+                while(list.size() > this.capacity) {
+                    list.remove(0);
+                }
+            }
+
+            index.set(list.size());
+        }
+
         public void complete(Notification<T> n) {
             terminalValue.set(n);
         }
diff --git a/rxjava-core/src/test/java/rx/observables/BlockingObservableTest.java b/rxjava-core/src/test/java/rx/observables/BlockingObservableTest.java
index 2d50027dad..82634909b1 100644
--- a/rxjava-core/src/test/java/rx/observables/BlockingObservableTest.java
+++ b/rxjava-core/src/test/java/rx/observables/BlockingObservableTest.java
@@ -15,25 +15,26 @@
  */
 package rx.observables;
 
-import static org.junit.Assert.*;
-
-import java.util.Iterator;
-import java.util.NoSuchElementException;
-
 import org.junit.Assert;
+import static org.junit.Assert.assertEquals;
+import static org.junit.Assert.fail;
 import org.junit.Before;
 import org.junit.Test;
 import org.mockito.Mock;
 import org.mockito.MockitoAnnotations;
-
 import rx.Observable;
 import rx.Observer;
 import rx.Subscription;
+import rx.subjects.BehaviorSubject;
+import rx.subjects.ReplaySubject;
 import rx.subscriptions.BooleanSubscription;
 import rx.subscriptions.Subscriptions;
 import rx.util.functions.Action1;
 import rx.util.functions.Func1;
 
+import java.util.Iterator;
+import java.util.NoSuchElementException;
+
 public class BlockingObservableTest {
 
     @Mock
@@ -382,6 +383,26 @@ public Boolean call(String args) {
         assertEquals("default", first);
     }
 
+    @Test
+    public void testBehaviorSubject() {
+        BehaviorSubject<String> subject = BehaviorSubject.create("default");
+        subject.onNext("one");
+        BlockingObservable<String> observable = subject.toBlockingObservable();
+        String last = observable.first();
+        assertEquals("one", last);
+    }
+
+    @Test
+    public void testReplaySubjectWithCapacity() {
+        ReplaySubject<String> subject = ReplaySubject.create(1);
+        subject.onNext("one");
+        subject.onNext("two");
+        subject.onNext("three");
+
+        String last = subject.asObservable().toBlockingObservable().first();
+        assertEquals("three", last);
+    }
+
     private static class TestException extends RuntimeException {
         private static final long serialVersionUID = 1L;
     }
diff --git a/rxjava-core/src/test/java/rx/subjects/ReplaySubjectTest.java b/rxjava-core/src/test/java/rx/subjects/ReplaySubjectTest.java
index 87cfdb4b8d..adea522e96 100644
--- a/rxjava-core/src/test/java/rx/subjects/ReplaySubjectTest.java
+++ b/rxjava-core/src/test/java/rx/subjects/ReplaySubjectTest.java
@@ -1,12 +1,12 @@
 /**
  * Copyright 2014 Netflix, Inc.
- * 
+ *
  * Licensed under the Apache License, Version 2.0 (the "License");
  * you may not use this file except in compliance with the License.
  * You may obtain a copy of the License at
- * 
+ *
  * http://www.apache.org/licenses/LICENSE-2.0
- * 
+ *
  * Unless required by applicable law or agreed to in writing, software
  * distributed under the License is distributed on an "AS IS" BASIS,
  * WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
@@ -15,22 +15,20 @@
  */
 package rx.subjects;
 
-import static org.junit.Assert.*;
-import static org.mockito.Matchers.*;
-import static org.mockito.Mockito.*;
-
-import java.util.concurrent.CountDownLatch;
-import java.util.concurrent.atomic.AtomicReference;
-
+import static org.junit.Assert.assertEquals;
 import org.junit.Test;
 import org.mockito.InOrder;
+import static org.mockito.Matchers.any;
 import org.mockito.Mockito;
-
+import static org.mockito.Mockito.*;
 import rx.Observer;
 import rx.Subscription;
 import rx.observers.TestObserver;
 import rx.schedulers.Schedulers;
 
+import java.util.concurrent.CountDownLatch;
+import java.util.concurrent.atomic.AtomicReference;
+
 public class ReplaySubjectTest {
 
     private final Throwable testException = new Throwable();
@@ -63,14 +61,10 @@ public void testCompleted() {
     @Test
     public void testCompletedStopsEmittingData() {
         ReplaySubject<Integer> channel = ReplaySubject.create();
-        @SuppressWarnings("unchecked")
-        Observer<Object> observerA = mock(Observer.class);
-        @SuppressWarnings("unchecked")
-        Observer<Object> observerB = mock(Observer.class);
-        @SuppressWarnings("unchecked")
-        Observer<Object> observerC = mock(Observer.class);
-        @SuppressWarnings("unchecked")
-        Observer<Object> observerD = mock(Observer.class);
+        @SuppressWarnings("unchecked") Observer<Object> observerA = mock(Observer.class);
+        @SuppressWarnings("unchecked") Observer<Object> observerB = mock(Observer.class);
+        @SuppressWarnings("unchecked") Observer<Object> observerC = mock(Observer.class);
+        @SuppressWarnings("unchecked") Observer<Object> observerD = mock(Observer.class);
 
         Subscription a = channel.toObservable().subscribe(new TestObserver<Object>(observerA));
         Subscription b = channel.toObservable().subscribe(new TestObserver<Object>(observerB));
@@ -132,8 +126,7 @@ public void testCompletedStopsEmittingData() {
     public void testCompletedAfterError() {
         ReplaySubject<String> subject = ReplaySubject.create();
 
-        @SuppressWarnings("unchecked")
-        Observer<String> observer = mock(Observer.class);
+        @SuppressWarnings("unchecked") Observer<String> observer = mock(Observer.class);
 
         subject.onNext("one");
         subject.onError(testException);
@@ -147,6 +140,63 @@ public void testCompletedAfterError() {
         verifyNoMoreInteractions(observer);
     }
 
+    @Test
+    public void testCapacity() {
+        {
+            ReplaySubject<String> subject = ReplaySubject.create(1);
+            @SuppressWarnings("unchecked") Observer<String> aObserver = mock(Observer.class);
+            subject.toObservable().subscribe(new TestObserver<String>(aObserver));
+
+            subject.onNext("one");
+            subject.onNext("two");
+            subject.onNext("three");
+            subject.onCompleted();
+
+            assertCompletedObserver(aObserver);
+
+            Observer<String> anotherObserver = mock(Observer.class);
+            subject.toObservable().subscribe(new TestObserver<String>(anotherObserver));//.toObservable().subscribe(anotherObserver);
+
+            verify(anotherObserver, times(0)).onNext("one");
+            verify(anotherObserver, times(0)).onNext("two");
+            verify(anotherObserver, times(1)).onNext("three");
+            verify(anotherObserver, times(1)).onCompleted();
+            verifyNoMoreInteractions(anotherObserver);
+        }
+        {
+            ReplaySubject<String> subject = ReplaySubject.create(1);
+            @SuppressWarnings("unchecked") Observer<String> aObserver = mock(Observer.class);
+            subject.onNext("one");
+
+            subject.toObservable().distinctUntilChanged().subscribe(new TestObserver<String>(aObserver));
+
+            subject.onNext("two");
+            subject.onNext("one");
+            subject.onNext("one");
+            verify(aObserver, times(2)).onNext("one");
+            verify(aObserver, times(1)).onNext("two");
+        }
+    }
+
+    @Test
+    public void testThatObserverReceivesLatestAndThenSubsequentEvents() {
+        ReplaySubject<String> subject = ReplaySubject.create(1);
+
+        subject.onNext("one");
+
+        @SuppressWarnings("unchecked") Observer<String> aObserver = mock(Observer.class);
+        subject.toObservable().subscribe(new TestObserver<String>(aObserver));
+        subject.onNext("two");
+        subject.onNext("three");
+
+        verify(aObserver, Mockito.never()).onNext("default");
+        verify(aObserver, times(1)).onNext("one");
+        verify(aObserver, times(1)).onNext("two");
+        verify(aObserver, times(1)).onNext("three");
+        verify(aObserver, Mockito.never()).onError(testException);
+        verify(aObserver, Mockito.never()).onCompleted();
+    }
+
     private void assertCompletedObserver(Observer<String> observer) {
         InOrder inOrder = inOrder(observer);