diff --git a/src/cmd/gc/esc.c b/src/cmd/gc/esc.c
index 7e20457d9a..2614b5f356 100644
--- a/src/cmd/gc/esc.c
+++ b/src/cmd/gc/esc.c
@@ -59,7 +59,7 @@ static int	dstcount, edgecount;	// diagnostic
 static NodeList*	noesc;	// list of possible non-escaping nodes, for printing
 
 void
-escapes(void)
+escapes(NodeList *all)
 {
 	NodeList *l;
 
@@ -70,9 +70,10 @@ escapes(void)
 	theSink.escloopdepth = -1;
 
 	safetag = strlit("noescape");
+	noesc = nil;
 
-	// flow-analyze top level functions
-	for(l=xtop; l; l=l->next)
+	// flow-analyze functions
+	for(l=all; l; l=l->next)
 		if(l->n->op == ODCLFUNC || l->n->op == OCLOSURE)
 			escfunc(l->n);
 
@@ -84,7 +85,7 @@ escapes(void)
 		escflood(l->n);
 
 	// for all top level functions, tag the typenodes corresponding to the param nodes
-	for(l=xtop; l; l=l->next)
+	for(l=all; l; l=l->next)
 		if(l->n->op == ODCLFUNC)
 			esctag(l->n);
 
diff --git a/src/cmd/gc/go.h b/src/cmd/gc/go.h
index fcbea2cd90..81be4d25b1 100644
--- a/src/cmd/gc/go.h
+++ b/src/cmd/gc/go.h
@@ -955,7 +955,7 @@ NodeList*	variter(NodeList *vl, Node *t, NodeList *el);
 /*
  *	esc.c
  */
-void	escapes(void);
+void	escapes(NodeList*);
 
 /*
  *	export.c
diff --git a/src/cmd/gc/lex.c b/src/cmd/gc/lex.c
index e880b2f34c..924865b939 100644
--- a/src/cmd/gc/lex.c
+++ b/src/cmd/gc/lex.c
@@ -186,7 +186,7 @@ int
 main(int argc, char *argv[])
 {
 	int i, c;
-	NodeList *l;
+	NodeList *l, *batch;
 	char *p;
 
 #ifdef	SIGBUS	
@@ -390,7 +390,7 @@ main(int argc, char *argv[])
 
 	// Phase 5: escape analysis.
 	if(!debug['N'])
-		escapes();
+		escapes(xtop);
 
 	// Phase 6: Compile top level functions.
 	for(l=xtop; l; l=l->next)
@@ -401,14 +401,17 @@ main(int argc, char *argv[])
 		fninit(xtop);
 
 	// Phase 6b: Compile all closures.
+	// Can generate more closures, so run in batches.
 	while(closures) {
-		l = closures;
+		batch = closures;
 		closures = nil;
-		for(; l; l=l->next) {
-			if (debug['l'])
+		if(debug['l'])
+			for(l=batch; l; l=l->next)
 				inlcalls(l->n);
+		if(!debug['N'])
+			escapes(batch);
+		for(l=batch; l; l=l->next)
 			funccompile(l->n, 1);
-		}
 	}
 
 	// Phase 7: check external declarations.
diff --git a/test/escape2.go b/test/escape2.go
index dde96bcc1e..624ea80b55 100644
--- a/test/escape2.go
+++ b/test/escape2.go
@@ -5,7 +5,7 @@
 // license that can be found in the LICENSE file.
 
 // Test, using compiler diagnostic flags, that the escape analysis is working.
-// Compiles but does not run.
+// Compiles but does not run.  Inlining is disabled.
 
 package foo
 
diff --git a/test/escape4.go b/test/escape4.go
new file mode 100644
index 0000000000..ab3aee2244
--- /dev/null
+++ b/test/escape4.go
@@ -0,0 +1,33 @@
+// errchk -0 $G -m $D/$F.go
+
+// Copyright 2010 The Go Authors.  All rights reserved.
+// Use of this source code is governed by a BSD-style
+// license that can be found in the LICENSE file.
+
+// Test, using compiler diagnostic flags, that the escape analysis is working.
+// Compiles but does not run.  Inlining is enabled.
+
+package foo
+
+var p *int
+
+func alloc(x int) *int {  // ERROR "can inline alloc" "moved to heap: x"
+	return &x  // ERROR "&x escapes to heap"
+}
+
+var f func()
+
+func f1() {
+	p = alloc(2) // ERROR "inlining call to alloc" "&x escapes to heap" "moved to heap: x"
+
+	// Escape analysis used to miss inlined code in closures.
+
+	func() {  // ERROR "func literal does not escape"
+		p = alloc(3)  // ERROR "inlining call to alloc" "&x escapes to heap" "moved to heap: x"
+	}()
+	
+	f = func() {  // ERROR "func literal escapes to heap"
+		p = alloc(3)  // ERROR "inlining call to alloc" "&x escapes to heap" "moved to heap: x"
+	}
+	f()
+}