--- a/nashorn/src/jdk/nashorn/internal/parser/Parser.java	Thu Jan 24 16:21:32 2013 +0530
+++ b/nashorn/src/jdk/nashorn/internal/parser/Parser.java	Thu Jan 24 17:49:03 2013 +0530
@@ -2495,7 +2495,7 @@
 
         final FunctionNode functionNode = functionBody(functionToken, name, parameters, FunctionNode.Kind.NORMAL);
 
-        if (isStatement) {
+        if (isStatement && !isInWithBlock()) {
             functionNode.setIsStatement();
         }
 
@@ -2544,7 +2544,14 @@
         }
 
         if (isStatement) {
-            functionNode.setFunctionVarNode(new VarNode(source, functionToken, finish, name, referenceNode), lineNumber);
+            final VarNode var = new VarNode(source, functionToken, finish, name, referenceNode);
+            if (isInWithBlock()) {
+                function.addDeclaration(var);
+                // Add to current block.
+                block.addStatement(var);
+            } else {
+                functionNode.setFunctionVarNode(var, lineNumber);
+            }
         }
 
         return referenceNode;

--- /dev/null	Thu Jan 01 00:00:00 1970 +0000
+++ b/nashorn/test/script/basic/JDK-8006755.js	Thu Jan 24 17:49:03 2013 +0530
@@ -0,0 +1,41 @@
+/*
+ * Copyright (c) 2010, 2013, Oracle and/or its affiliates. All rights reserved.
+ * DO NOT ALTER OR REMOVE COPYRIGHT NOTICES OR THIS FILE HEADER.
+ *
+ * This code is free software; you can redistribute it and/or modify it
+ * under the terms of the GNU General Public License version 2 only, as
+ * published by the Free Software Foundation.
+ *
+ * This code is distributed in the hope that it will be useful, but WITHOUT
+ * ANY WARRANTY; without even the implied warranty of MERCHANTABILITY or
+ * FITNESS FOR A PARTICULAR PURPOSE.  See the GNU General Public License
+ * version 2 for more details (a copy is included in the LICENSE file that
+ * accompanied this code).
+ *
+ * You should have received a copy of the GNU General Public License version
+ * 2 along with this work; if not, write to the Free Software Foundation,
+ * Inc., 51 Franklin St, Fifth Floor, Boston, MA 02110-1301 USA.
+ *
+ * Please contact Oracle, 500 Oracle Parkway, Redwood Shores, CA 94065 USA
+ * or visit www.oracle.com if you need additional information or have any
+ * questions.
+ */
+
+/**
+ * JDK-8006755: Functions inside with statements dont get correct scope
+ *
+ * @test
+ * @run
+ */
+
+var scope = { x: "hello" };
+
+with (scope) {
+    function main() {
+        if (x != "hello") {
+            fail("x != 'hello'");
+        }
+    }
+}
+
+main()