diff --git a/gcc/ChangeLog b/gcc/ChangeLog
index 20e95b7000a..1d4a1ff71db 100644
--- a/gcc/ChangeLog
+++ b/gcc/ChangeLog
@@ -1,3 +1,9 @@
+2002-11-01  Mark Mitchell  <mark@codesourcery.com>
+
+	PR c++/8391
+	* toplev.c (rest_of_compilation): Do not refuse to output code for
+	an inline function in a local class.
+
 2002-11-01  David O'Brien  <obrien@FreeBSD.org>
 
 	* config/sparc/freebsd.h (CPP_CPU64_DEFAULT_SPEC): Define __arch64__.
diff --git a/gcc/testsuite/ChangeLog b/gcc/testsuite/ChangeLog
index 437893d0b51..90877e84ac1 100644
--- a/gcc/testsuite/ChangeLog
+++ b/gcc/testsuite/ChangeLog
@@ -1,3 +1,8 @@
+2002-11-01  Mark Mitchell  <mark@codesourcery.com>
+
+	PR c++/8391
+	* g++.dg/opt/local1.C: New test.
+
 2002-10-30  Mark Mitchell  <mark@codesourcery.com>
 
 	PR c++/8160
diff --git a/gcc/testsuite/g++.dg/opt/local1.C b/gcc/testsuite/g++.dg/opt/local1.C
new file mode 100644
index 00000000000..9cecaee6f2a
--- /dev/null
+++ b/gcc/testsuite/g++.dg/opt/local1.C
@@ -0,0 +1,20 @@
+// { dg-options "-O" }
+
+struct Outer {
+  struct Inner { virtual bool f() = 0; };
+  void g(Inner &) const;
+};
+ 
+inline void h(const Outer &o)
+{
+  struct Local : public Outer::Inner {
+    virtual bool f() {};
+  };
+  Local l;
+  o.g(l);
+}
+ 
+void f(Outer &req) {
+  h (req);
+}
+ 
diff --git a/gcc/toplev.c b/gcc/toplev.c
index 2f3d127441d..9e57576ebab 100644
--- a/gcc/toplev.c
+++ b/gcc/toplev.c
@@ -2429,6 +2429,9 @@ rest_of_compilation (decl)
 	    DECL_INITIAL (decl) = 0;
 	    goto exit_rest_of_compilation;
 	  }
+	else if (TYPE_P (parent))
+	  /* A function in a local class should be treated normally.  */
+	  break;
 
       /* If requested, consider whether to make this function inline.  */
       if ((DECL_INLINE (decl) && !flag_no_inline)