Index: Lib/io.py
===================================================================
--- Lib/io.py	(revision 58888)
+++ Lib/io.py	(working copy)
@@ -1037,6 +1037,37 @@
         return None
 
 
+class IncrementalNewlineDecoder(codecs.BufferedIncrementalDecoder):
+    def __init__(self, decoder, errors='strict'):
+        codecs.BufferedIncrementalDecoder.__init__(self, errors=errors)
+        self.decoder = decoder
+
+    def _buffer_decode(self, input, errors, final):
+        output = self.decoder.decode(input, final=final)
+        consumed = len(input)
+        if output.endswith("\r") and not final:
+            output = output[:-1]
+            consumed -= 1
+
+        output = output.replace("\r\n", "\n")
+        output = output.replace("\r", "\n")
+        return output, consumed
+
+    def getstate(self):
+        buf, flag = self.decoder.getstate()
+        return buf + self.buffer, flag
+
+    def setstate(self, state):
+        buf, flag = state
+        if buf.endswith(b'\r'):
+            self.buffer = b'\r'
+            buf = buf[:-1]
+        else:
+            self.buffer = b''
+        self.decoder.setstate((buf, flag))
+
 class TextIOWrapper(TextIOBase):
 
     """Buffered text stream.
@@ -1133,7 +1160,10 @@
         if make_decoder is None:
             raise IOError("Can't find an incremental decoder for encoding %s" %
                           self._encoding)
-        decoder = self._decoder = make_decoder()  # XXX: errors
+        decoder = make_decoder()  # XXX: errors
+        if self._readtranslate:
+            decoder = IncrementalNewlineDecoder(decoder)
+        self._decoder = decoder
         return decoder
 
     def _read_chunk(self):
@@ -1376,10 +1406,6 @@
             lf = data.count('\n') - crlf
             self._seennl |= (lf and self._LF) | (cr and self._CR) \
                          | (crlf and self._CRLF)
-            if crlf:
-                data = data.replace("\r\n", "\n")
-            if cr:
-                data = data.replace("\r", "\n")
         elif self._readnl == '\n':
             # Only need to detect if \n was seen.
             if data.count('\n'):
Index: Lib/test/test_io.py
===================================================================
--- Lib/test/test_io.py	(revision 58888)
+++ Lib/test/test_io.py	(working copy)
@@ -485,6 +485,10 @@
 
 class TextIOWrapperTest(unittest.TestCase):
 
+    def setUp(self):
+        self.testdata = b"AAA\r\nBBB\rCCC\r\nDDD\nEEE\r\n"
+        self.normalized = b"AAA\nBBB\nCCC\nDDD\nEEE\n".decode("ASCII")
+
     def tearDown(self):
         test_support.unlink(test_support.TESTFN)
 
@@ -741,6 +745,110 @@
                 print("Reading using readline(): %6.3f seconds" % (t3-t2))
                 print("Using readline()+tell():  %6.3f seconds" % (t4-t3))
 
+    def testReadOneByOne(self):
+        txt = io.TextIOWrapper(io.BytesIO(b"AA\r\nBB"))
+        reads = ""
+        while True:
+            c = txt.read(1)
+            if not c:
+                break
+            reads += c
+        self.assertEquals(reads, "AA\nBB")
+
+    # read in amounts equal to TextIOWrapper._CHUNK_SIZE which is 128.
+    def testReadByChunk(self):
+        # make sure "\r\n" straddles 128 char boundary.
+        txt = io.TextIOWrapper(io.BytesIO(b"A" * 127 + b"\r\nB"))
+        reads = ""
+        while True:
+            c = txt.read(128)
+            if not c:
+                break
+            reads += c
+        self.assertEquals(reads, "A"*127+"\nB")
+
+    def test_issue1395_1(self):
+        txt = io.TextIOWrapper(io.BytesIO(self.testdata), encoding="ASCII")
+
+        # read one char at a time
+        reads = ""
+        while True:
+            c = txt.read(1)
+            if not c:
+                break
+            reads += c
+        self.assertEquals(reads, self.normalized)
+
+    def test_issue1395_2(self):
+        txt = io.TextIOWrapper(io.BytesIO(self.testdata), encoding="ASCII")
+        txt._CHUNK_SIZE = 4
+
+        reads = ""
+        while True:
+            c = txt.read(4)
+            if not c:
+                break
+            reads += c
+        self.assertEquals(reads, self.normalized)
+
+    def test_issue1395_3(self):
+        txt = io.TextIOWrapper(io.BytesIO(self.testdata), encoding="ASCII")
+        txt._CHUNK_SIZE = 4
+
+        reads = txt.read(4)
+        reads += txt.read(4)
+        reads += txt.readline()
+        reads += txt.readline()
+        reads += txt.readline()
+        self.assertEquals(reads, self.normalized)
+
+    def test_issue1395_4(self):
+        txt = io.TextIOWrapper(io.BytesIO(self.testdata), encoding="ASCII")
+        txt._CHUNK_SIZE = 4
+
+        reads = txt.read(4)
+        reads += txt.read()
+        self.assertEquals(reads, self.normalized)
+
+    def test_issue1395_5(self):
+        txt = io.TextIOWrapper(io.BytesIO(self.testdata), encoding="ASCII")
+        txt._CHUNK_SIZE = 4
+
+        reads = txt.read(4)
+        pos = txt.tell()
+        txt.seek(0)
+        txt.seek(pos)
+        self.assertEquals(txt.read(4), "BBB\n")
+
+    def test_newline_decoder(self):
+        import codecs
+        decoder = codecs.getincrementaldecoder("utf-8")()
+        decoder = io.IncrementalNewlineDecoder(decoder)
+
+        self.assertEquals(decoder.decode(b'\xe8\xa2\x88'), "\u8888")
+
+        self.assertEquals(decoder.decode(b'\xe8'), "")
+        self.assertEquals(decoder.decode(b'\xa2'), "")
+        self.assertEquals(decoder.decode(b'\x88'), "\u8888")
+
+        self.assertEquals(decoder.decode(b'\xe8'), "")
+        self.assertRaises(UnicodeDecodeError, decoder.decode, b'', final=True)
+
+        decoder.reset()
+        self.assertEquals(decoder.decode(b'\n'), "\n")
+        self.assertEquals(decoder.decode(b'\r'), "")
+        self.assertEquals(decoder.decode(b'', final=True), "\n")
+
+        self.assertEquals(decoder.decode(b'\r\r\n'), "\n\n")
+        self.assertEquals(decoder.decode(b'\r'), "")
+        self.assertEquals(decoder.decode(b'\r'), "\n")
+        self.assertEquals(decoder.decode(b'\n'), "\n")
+
+        self.assertEquals(decoder.decode(b'\xe8\xa2\x88\r\n'), "\u8888\n")
+        self.assertEquals(decoder.decode(b'\xe8\xa2\x88'), "\u8888")
+        self.assertEquals(decoder.decode(b'\n'), "\n")
+        self.assertEquals(decoder.decode(b'\xe8\xa2\x88\r'), "\u8888")
+        self.assertEquals(decoder.decode(b'\n'), "\n")
 
 # XXX Tests for open()