diff --git a/flask/app.py b/flask/app.py
index 2cad86e2..14b6d138 100644
--- a/flask/app.py
+++ b/flask/app.py
@@ -568,8 +568,12 @@ class Flask(_PackageBoundObject):
         package_path = self.root_path
         if hasattr(root_mod, '__path__'):
             package_path = os.path.dirname(package_path)
-        site_parent, site_folder = os.path.split(package_path)
 
+        # leave the egg wrapper folder or the actual .egg on the filesystem
+        if os.path.basename(package_path).endswith('.egg'):
+            package_path = os.path.dirname(package_path)
+
+        site_parent, site_folder = os.path.split(package_path)
         py_prefix = os.path.abspath(sys.prefix)
         if package_path.startswith(py_prefix):
             base_dir = py_prefix
diff --git a/tests/flask_tests.py b/tests/flask_tests.py
index 7b3f334e..4b0150af 100644
--- a/tests/flask_tests.py
+++ b/tests/flask_tests.py
@@ -1077,6 +1077,23 @@ class InstanceTestCase(unittest.TestCase):
         finally:
             sys.modules['myapp'] = None
 
+    def test_egg_installed_paths(self):
+        import types
+        expected_prefix = os.path.abspath(sys.prefix)
+        package_path = os.path.join(expected_prefix, 'lib', 'python2.5',
+                                    'site-packages', 'MyApp.egg', 'myapp')
+        mod = types.ModuleType('myapp')
+        mod.__path__ = [package_path]
+        mod.__file__ = os.path.join(package_path, '__init__.py')
+        sys.modules['myapp'] = mod
+        try:
+            mod.app = flask.Flask(mod.__name__)
+            self.assertEqual(mod.app.instance_path,
+                             os.path.join(expected_prefix, 'share',
+                                          'myapp-instance'))
+        finally:
+            sys.modules['myapp'] = None
+
 
 class JSONTestCase(unittest.TestCase):