diff --git a/rxjava-core/src/main/java/rx/Observable.java b/rxjava-core/src/main/java/rx/Observable.java
index 8106af0556..b5f45e225c 100644
--- a/rxjava-core/src/main/java/rx/Observable.java
+++ b/rxjava-core/src/main/java/rx/Observable.java
@@ -192,14 +192,14 @@ public void call(Subscriber<? super R> o) {
      * @param transformer
      * @return
      */
-    public <R> Observable<R> compose(Transformer<T, R> transformer) {
+    public <R> Observable<? extends R> compose(Transformer<? super T, ? extends R> transformer) {
         return transformer.call(this);
     }
     
     /**
      * Transformer function for `compose`
      */
-    public static interface Transformer<T, R> extends Func1<Observable<T>, Observable<R>> {
+    public static interface Transformer<T, R> extends Func1<Observable<? extends T>, Observable<? extends R>> {
         // cover for generics insanity
     }
     
diff --git a/rxjava-core/src/test/java/rx/CovarianceTest.java b/rxjava-core/src/test/java/rx/CovarianceTest.java
index adf3a8c9b8..5f5a7e2f29 100644
--- a/rxjava-core/src/test/java/rx/CovarianceTest.java
+++ b/rxjava-core/src/test/java/rx/CovarianceTest.java
@@ -19,6 +19,7 @@
 
 import org.junit.Test;
 
+import rx.Observable.Transformer;
 import rx.functions.Func2;
 
 /**
@@ -57,6 +58,32 @@ public Integer call(Media t1, Media t2) {
         o2.toSortedList(SORT_FUNCTION);
     }
 
+    
+    @Test
+    public void testCovarianceOfCompose() {
+        Observable<HorrorMovie> movie = Observable.<HorrorMovie> from(new HorrorMovie());
+        movie.compose(new Transformer<Movie, Movie>() {
+
+            @Override
+            public Observable<? extends Movie> call(Observable<? extends Movie> t1) {
+                return Observable.from(new Movie());
+            }
+            
+        });
+    }
+    
+    @Test
+    public void testCovarianceOfCompose2() {
+        Observable<Movie> movie = Observable.<Movie> from(new HorrorMovie());
+        movie.compose(new Transformer<Movie, Movie>() {
+            @Override
+            public Observable<? extends Movie> call(Observable<? extends Movie> t1) {
+                return Observable.from(new HorrorMovie());
+            }
+        });
+    }
+    
+    
     /*
      * Most tests are moved into their applicable classes such as [Operator]Tests.java
      */
diff --git a/rxjava-core/src/test/java/rx/ObservableTests.java b/rxjava-core/src/test/java/rx/ObservableTests.java
index cdee0440a1..91e1113cb3 100644
--- a/rxjava-core/src/test/java/rx/ObservableTests.java
+++ b/rxjava-core/src/test/java/rx/ObservableTests.java
@@ -1108,9 +1108,9 @@ public void testCompose() {
         Observable.from(1, 2, 3).compose(new Transformer<Integer, String>() {
 
             @Override
-            public Observable<String> call(Observable<Integer> t1) {
+            public Observable<? extends String> call(Observable<? extends Integer> t1) {
                 return t1.map(new Func1<Integer, String>() {
-
+                    
                     @Override
                     public String call(Integer t1) {
                         return String.valueOf(t1);