Index: kernel-impl/src/test/java/org/sakaiproject/component/impl/BasicConfigurationServiceTest.java
===================================================================
--- kernel-impl/src/test/java/org/sakaiproject/component/impl/BasicConfigurationServiceTest.java	(revision 121412)
+++ kernel-impl/src/test/java/org/sakaiproject/component/impl/BasicConfigurationServiceTest.java	(working copy)
@@ -100,15 +100,21 @@
         assertEquals("Aaron Zeckoski", basicConfigurationService.getConfig("test7", "default") );
     }
 
-    public void disabled_testKNL1038() throws Exception {
-        // KNL-1038 - "${sakai.home}/samigo/answerUploadRepositoryPath"
+    public void testKNL1038() throws Exception {
+        /* KNL-1038 - "${sakai.home}/samigo/answerUploadRepositoryPath"
+         * This is basically testing whether replacements work in default values
+         * (as they should)
+         */
         String val = null;
         val = basicConfigurationService.getString("name");
-        assertNotNull(val);
+        assertNotSame("", val);
         assertEquals("Aaron", val);
 
+        // namePlusLast should NOT exist
+        val = basicConfigurationService.getString("namePlusLast");
+        assertEquals("", val);
         val = basicConfigurationService.getString("namePlusLast", "${name} Zeckoski");
-        assertNotNull(val);
+        assertNotSame("", val);
         assertEquals("Aaron Zeckoski", val);
     }
 
Index: kernel-impl/src/main/java/org/sakaiproject/component/impl/BasicConfigurationService.java
===================================================================
--- kernel-impl/src/main/java/org/sakaiproject/component/impl/BasicConfigurationService.java	(revision 121411)
+++ kernel-impl/src/main/java/org/sakaiproject/component/impl/BasicConfigurationService.java	(working copy)
@@ -498,8 +498,6 @@
         if (ci != null) {
             if (ci.getValue() != null) {
                 value = StringUtils.trimToNull(ci.getValue().toString());
-                // check if we need to do any variable replacement
-                value = dereferenceValue(value);
             } else {
                 // if the default value is set then we will return that instead
                 if (ci.getDefaultValue() != null) {
@@ -509,6 +507,10 @@
                 }
             }
         }
+        if (StringUtils.isNotEmpty(value)) {
+            // check if we need to do any variable replacement
+            value = dereferenceValue(value);
+        }
         return value;
     }