diff --git a/layout-test.html b/layout-test.html
index 3d7f2c8..eaa0a2e 100644
--- a/layout-test.html
+++ b/layout-test.html
@@ -26,6 +26,15 @@
 {{> yield region="footer"}}
 </template>
 
+<template name="LayoutThatSetsData">
+  {{#with childData}}
+    {{> yield}}
+  {{/with}}
+  {{#with childData}}
+    {{> yield region="footer"}}
+  {{/with}}
+</template>
+
 <template name="ChildWithData">
 child {{title}}
 </template>
@@ -58,3 +67,11 @@
 <template name="TemplateWithCreatedCallback">
   callback
 </template>
+
+<template name="DefaultDataForLayout">
+  {{#with title="ok"}}
+    {{#Layout template="LayoutWithOneYield"}}
+      inner{{title}}
+    {{/Layout}}
+  {{/with}}
+</template>
diff --git a/layout-test.js b/layout-test.js
index f6b6b97..a151ad9 100644
--- a/layout-test.js
+++ b/layout-test.js
@@ -98,6 +98,12 @@ Tinytest.add('layout - default main region using Layout template', function (tes
   });
 });
 
+Tinytest.add('layout - default data context using Layout template', function (test) {
+  withRenderedComponent(Template.DefaultDataForLayout, function (cmp, screen) {
+    test.equal(screen.innerHTML.compact(), 'layoutinnerok', 'default data context should be outer data context');
+  });
+});
+
 Tinytest.add('layout - dynamic yield regions', function (test) {
   withRenderedLayout({template: 'LayoutWithTwoYields'}, function (layout, screen) {
     var renderedCount = 1;
@@ -224,7 +230,6 @@ Tinytest.add('layout - region templates not found in lookup', function (test) {
 });
 
 
-
 // SEE IR#276 for detailed discussion
 Tinytest.add('layout - Templates render with correct data even if setData is called after setRegion', function (test) {
   withRenderedLayout({template: 'LayoutWithOneYield'}, function (layout, screen) {
@@ -243,4 +248,27 @@ Tinytest.add('layout - Templates render with correct data even if setData is cal
     Deps.flush();
     test.equal(screen.innerHTML.compact(), 'layoutcallback');
   });
-});
\ No newline at end of file
+});
+
+// XXX: This test doesn't work. 
+// To be totally honest, I'm not sure how it *should* work -- should
+// the yield be getting the data context of the with block? Maybe..
+// perhaps yield.data() should look at parent's data (modolo __isTemplateWith)
+// just like layout does.
+// 
+// Tinytest.add('layout - set data via with', function (test) {
+//   withRenderedLayout({template: 'LayoutThatSetsData'}, function (layout, screen) {
+//     layout.setRegion('main', 'ChildWithData');
+//     layout.setRegion('footer', 'FooterWithData');
+//     
+//     layout.setData({
+//       title: 'parentTitle',
+//       childData: {
+//         title: 'childTitle'
+//       }
+//     });
+//     
+//     Deps.flush();
+//     test.equal(screen.innerHTML.compact(), 'childchildTitlefooterchildTitle');
+//   });
+// });
diff --git a/layout.js b/layout.js
index 454f7c0..840da23 100644
--- a/layout.js
+++ b/layout.js
@@ -104,7 +104,7 @@ Layout = UI.Component.extend({
     var tmplDep = new Deps.Dependency;
 
     // get the initial data value
-    var data = Deps.nonreactive(function () { return self.get(); });
+    var data, dataSet = false;
     var dataDep = new Deps.Dependency;
     var regions = this._regions = new ReactiveDict;
     var content = this.__content;
@@ -136,10 +136,26 @@ Layout = UI.Component.extend({
     var cachedData = Deps.cache(function () {
       log('return data()');
       dataDep.depend();
-      return data;
+      if (dataSet) {
+        return data;
+      } else {
+        // find the closest parent with a data context.
+        // If it's the direct parent, and it has `__isTemplateWith` set, 
+        // then it's because we have `{{#Layout foo=bar}}` and we should ignore
+        var parent = self.parent;
+        if (parent) {
+          if (parent.__isTemplateWith)
+            parent = parent.parent;
+          return getComponentData(parent);
+        } else {
+          // the only time we don't have a parent is when we are in tests really
+          return null
+        }
+      }
     });
 
     this.setData = function (value) {
+      dataSet = true;
       log('setData', value);
       if (!EJSON.equals(value, data)) {
         data = value;
@@ -204,6 +220,12 @@ Layout = UI.Component.extend({
         // reset the data function to use the layout's
         // data
         this.data = function () {
+          // XXX: should we be instead trying to sensibly get parent's
+          // data -- much like layout.getData() does? 
+          // then we'd expect to inherit layout.getData() (via layout.render)
+          // unless we wrapped our {{> yield}} in a with. 
+          // is this what users would expect?
+          // see 'layout - set data via with' test
           return layout.getData();
         };
       },