diff --git a/mercurial/bundle2.py b/mercurial/bundle2.py
--- a/mercurial/bundle2.py
+++ b/mercurial/bundle2.py
@@ -834,12 +834,21 @@
         if paramssize < 0:
             raise error.BundleValueError('negative bundle param size: %i'
                                          % paramssize)
-        yield _pack(_fstreamparamsize, paramssize)
         if paramssize:
             params = self._readexact(paramssize)
             self._processallparams(params)
-            yield params
-            assert self._compengine.bundletype()[1] == 'UN'
+            # The payload itself is decompressed below, so drop
+            # the compression parameter passed down to compensate.
+            outparams = []
+            for p in params.split(' '):
+                k, v = p.split('=', 1)
+                if k.lower() != 'compression':
+                    outparams.append(p)
+            outparams = ' '.join(outparams)
+            yield _pack(_fstreamparamsize, len(outparams))
+            yield outparams
+        else:
+            yield _pack(_fstreamparamsize, paramssize)
         # From there, payload might need to be decompressed
         self._fp = self._compengine.decompressorreader(self._fp)
         emptycount = 0
diff --git a/tests/test-pull-bundle.t b/tests/test-pull-bundle.t
--- a/tests/test-pull-bundle.t
+++ b/tests/test-pull-bundle.t
@@ -120,6 +120,38 @@
   * sending pullbundle "1.hg" (glob)
   $ rm repo/.hg/blackbox.log
 
+Test pullbundle functionality for incoming
+
+  $ cd repo
+  $ hg --config blackbox.track=debug --debug serve -p $HGPORT2 -d --pid-file=../repo.pid
+  listening at http://*:$HGPORT2/ (bound to $LOCALIP:$HGPORT2) (glob) (?)
+  $ cat ../repo.pid >> $DAEMON_PIDS
+  $ cd ..
+  $ hg clone http://localhost:$HGPORT2/ repo.pullbundle2a -r 0
+  adding changesets
+  adding manifests
+  adding file changes
+  added 1 changesets with 1 changes to 1 files
+  new changesets bbd179dfa0a7 (1 drafts)
+  updating to branch default
+  1 files updated, 0 files merged, 0 files removed, 0 files unresolved
+  $ cd repo.pullbundle2a
+  $ hg incoming -r ed1b79f46b9a
+  comparing with http://localhost:$HGPORT2/
+  searching for changes
+  changeset:   1:ed1b79f46b9a
+  tag:         tip
+  user:        test
+  date:        Thu Jan 01 00:00:00 1970 +0000
+  summary:     change foo
+  
+  $ cd ..
+  $ killdaemons.py
+  $ grep 'sending pullbundle ' repo/.hg/blackbox.log
+  * sending pullbundle "0.hg" (glob)
+  * sending pullbundle "1.hg" (glob)
+  $ rm repo/.hg/blackbox.log
+
 Test recovery from misconfigured server sending no new data
 
   $ cd repo