diff --git a/CHANGELOG b/CHANGELOG
index d34af05b0..367e3cefb 100644
--- a/CHANGELOG
+++ b/CHANGELOG
@@ -1,5 +1,6 @@
 Changes between 2.0.0 and 2.0.1.devX
 ----------------------------------------------
+
 - fix issue12 - show plugin versions with "--version" and
   "--traceconfig" and also document how to add extra information 
   to reporting test header
@@ -34,6 +35,12 @@ Changes between 2.0.0 and 2.0.1.devX
 - introduce a mechanism to prevent/unregister plugins from the 
   command line, see http://pytest.org/plugins.html#cmdunregister
 - activate resultlog plugin by default
+- fix regression wrt yielded tests which due to the
+  collection-before-running semantics were not 
+  setup as with pytest 1.3.4.  Note, however, that
+  the recommended and much cleaner way to do test 
+  parametraization remains the "pytest_generate_tests"
+  mechanism, see the docs.
 
 Changes between 1.3.4 and 2.0.0
 ----------------------------------------------
diff --git a/_pytest/python.py b/_pytest/python.py
index 64e48b763..f46258522 100644
--- a/_pytest/python.py
+++ b/_pytest/python.py
@@ -304,7 +304,9 @@ class FunctionMixin(PyobjMixin):
             name = 'setup_method'
         else:
             name = 'setup_function'
-        if isinstance(self.parent, Instance):
+        if hasattr(self, '_preservedparent'):
+            obj = self._preservedparent
+        elif isinstance(self.parent, Instance):
             obj = self.parent.newinstance()
             self.obj = self._getobj()
         else:
@@ -377,7 +379,8 @@ class Generator(FunctionMixin, PyCollectorMixin, pytest.Collector):
         # invoke setup/teardown on popular request
         # (induced by the common "test_*" naming shared with normal tests)
         self.config._setupstate.prepare(self)
-
+        # see FunctionMixin.setup and test_setupstate_is_preserved_134
+        self._preservedparent = self.parent.obj
         l = []
         seen = {}
         for i, x in enumerate(self.obj()):
diff --git a/testing/test_python.py b/testing/test_python.py
index a2d9e3670..3ee149357 100644
--- a/testing/test_python.py
+++ b/testing/test_python.py
@@ -196,6 +196,49 @@ class TestGenerator:
         assert passed == 4
         assert not skipped and not failed
 
+    def test_setupstate_is_preserved_134(self, testdir):
+        # yield-based tests are messy wrt to setupstate because
+        # during collection they already invoke setup functions
+        # and then again when they are run.  For now, we want to make sure
+        # that the old 1.3.4 behaviour is preserved such that all
+        # yielded functions all share the same "self" instance that
+        # has been used during collection.
+        o = testdir.makepyfile("""
+            setuplist = []
+            class TestClass:
+                def setup_method(self, func):
+                    #print "setup_method", self, func
+                    setuplist.append(self)
+                    self.init = 42
+
+                def teardown_method(self, func):
+                    self.init = None
+
+                def test_func1(self):
+                    pass
+
+                def test_func2(self):
+                    yield self.func2
+                    yield self.func2
+
+                def func2(self):
+                    assert self.init
+
+            def test_setuplist():
+                # once for test_func2 during collection
+                # once for test_func1 during test run
+                # once for test_func2 during test run
+                #print setuplist
+                assert len(setuplist) == 3, len(setuplist)
+                assert setuplist[0] == setuplist[2], setuplist
+                assert setuplist[1] != setuplist[2], setuplist
+        """)
+        reprec = testdir.inline_run(o, '-v')
+        passed, skipped, failed = reprec.countoutcomes()
+        assert passed == 4
+        assert not skipped and not failed
+
+
 class TestFunction:
     def test_getmodulecollector(self, testdir):
         item = testdir.getitem("def test_func(): pass")