Index: Python/peephole.c
===================================================================
--- Python/peephole.c	(revision 53289)
+++ Python/peephole.c	(working copy)
@@ -261,10 +261,12 @@
    The consts object should still be in list form to allow new constants 
    to be appended.
 
-   To keep the optimizer simple, it bails out (does nothing) for code
-   containing extended arguments or that has a length over 32,700.  That 
-   allows us to avoid overflow and sign issues.	 Likewise, it bails when
-   the lineno table has complex encoding for gaps >= 255.
+   To keep the optimizer simple, it bails out (does nothing) for code that
+   has a length over 32,700, and does not calculate extended arguments. 
+   That allows us to avoid overflow and sign issues. Likewise, it bails when
+   the lineno table has complex encoding for gaps >= 255. EXTENDED_ARG can
+   appear before MAKE_FUNCTION; in this case both opcodes are skipped.
+   EXTENDED_ARG preceding any other opcode causes the optimizer to bail.
 
    Optimizations are restricted to simple transformations occuring within a
    single basic block.	All transformations keep the code size the same or 
@@ -535,7 +537,11 @@
 				break;
 
 			case EXTENDED_ARG:
-				goto exitUnchanged;
+				if (codestr[i+3] != MAKE_FUNCTION)
+					goto exitUnchanged;
+				/* don't visit MAKE_FUNCTION as GETARG will be wrong */
+				i += 3;
+				break;
 
 				/* Replace RETURN LOAD_CONST None RETURN with just RETURN */
 				/* Remove unreachable JUMPs after RETURN */
Index: Python/compile.c
===================================================================
--- Python/compile.c	(revision 53289)
+++ Python/compile.c	(working copy)
@@ -1373,8 +1373,12 @@
 compiler_visit_annotations(struct compiler *c, arguments_ty args,
                            expr_ty returns)
 {
-	/* push arg annotations and a list of the argument names. return the #
-	   of items pushed. this is out-of-order wrt the source code. */
+	/* Push arg annotations and a list of the argument names. Return the #
+	   of items pushed. The expressions are evaluated out-of-order wrt the 
+	   source code. 
+	   
+	   More than 2^16-1 annotations is a SyntaxError. Returns -1 on error.
+	   */
 	static identifier return_str;
 	PyObject *names;
 	int len;
@@ -1405,6 +1409,12 @@
 	}
 
 	len = PyList_GET_SIZE(names);
+	if (len > 65534) {
+		/* len must fit in 16 bits, and len is incremented below */
+		PyErr_SetString(PyExc_SyntaxError,
+				"too many annotations");
+		goto error;
+	}	
 	if (len) {
 		/* convert names to a tuple and place on stack */
 		PyObject *elt;
@@ -1455,6 +1465,9 @@
 	if (args->defaults)
 		VISIT_SEQ(c, expr, args->defaults);
 	num_annotations = compiler_visit_annotations(c, args, returns);
+	if (num_annotations < 0)
+		return 0;
+	assert((num_annotations & 0xFFFF) == num_annotations);
 
 	if (!compiler_enter_scope(c, s->v.FunctionDef.name, (void *)s,
 				  s->lineno))
Index: Lib/test/test_compile.py
===================================================================
--- Lib/test/test_compile.py	(revision 53289)
+++ Lib/test/test_compile.py	(working copy)
@@ -396,6 +396,19 @@
         del d[..., ...]
         self.assertEqual((Ellipsis, Ellipsis) in d, False)
 
+    def test_annotation_limit(self):
+        # 16 bits are available for # of annotations, and the
+        # tuple of annotations names is counted, hence 65534
+        # is the max. Ensure the result of too many annotations is a
+        # SyntaxError.
+        s = "def f((%s)): pass"
+        s %= ', '.join('a%d:%d' % (i,i) for i in xrange(65535))        
+        self.assertRaises(SyntaxError, compile, s, '?', 'exec')
+        # Test that the max # of annotations compiles.
+        s = "def f((%s)): pass"
+        s %= ', '.join('a%d:%d' % (i,i) for i in xrange(65534))
+        compile(s, '?', 'exec')
+        
 def test_main():
     test_support.run_unittest(TestSpecifics)
 
Index: Lib/test/test_peepholer.py
===================================================================
--- Lib/test/test_peepholer.py	(revision 53289)
+++ Lib/test/test_peepholer.py	(working copy)
@@ -195,6 +195,14 @@
         # There should be one jump for the while loop.
         self.assertEqual(asm.split().count('JUMP_ABSOLUTE'), 1)
         self.assertEqual(asm.split().count('RETURN_VALUE'), 2)
+        
+    def test_make_function_doesnt_bail(self):
+        def f():
+            def g()->1+1: 
+                pass
+            return g
+        asm = disassemble(f)
+        self.assert_('BINARY_ADD' not in asm)              
 
 
 def test_main(verbose=None):