diff --git a/src/ng/compile.js b/src/ng/compile.js
index a1002b1c..958d2eb2 100644
--- a/src/ng/compile.js
+++ b/src/ng/compile.js
@@ -924,7 +924,7 @@ function $CompileProvider($provide, $$sanitizeUriProvider) {
       return linkFnFound ? compositeLinkFn : null;
 
       function compositeLinkFn(scope, nodeList, $rootElement, boundTranscludeFn) {
-        var nodeLinkFn, childLinkFn, node, $node, childScope, i, ii, n;
+        var nodeLinkFn, childLinkFn, node, $node, childScope, childTranscludeFn, i, ii, n;
 
         // copy nodeList so that linking doesn't break due to live list updates.
         var nodeListLength = nodeList.length,
@@ -946,17 +946,14 @@ function $CompileProvider($provide, $$sanitizeUriProvider) {
             } else {
               childScope = scope;
             }
-
-            // We need to create a new boundTranscludeFn if
-            //  - a directive on this element wants to transclude
-            //  or
-            //  - there is no boundTranscludeFn already and a transcludeFn was passed in
-            if ( nodeLinkFn.transcludeOnThisElement || (!boundTranscludeFn && transcludeFn) ) {
-              boundTranscludeFn = createBoundTranscludeFn(scope, nodeLinkFn.transclude || transcludeFn);
+            childTranscludeFn = nodeLinkFn.transclude;
+            if (childTranscludeFn || (!boundTranscludeFn && transcludeFn)) {
+              nodeLinkFn(childLinkFn, childScope, node, $rootElement,
+                createBoundTranscludeFn(scope, childTranscludeFn || transcludeFn)
+              );
+            } else {
+              nodeLinkFn(childLinkFn, childScope, node, $rootElement, boundTranscludeFn);
             }
-
-            nodeLinkFn(childLinkFn, childScope, node, $rootElement, boundTranscludeFn);
-
           } else if (childLinkFn) {
             childLinkFn(scope, node.childNodes, undefined, boundTranscludeFn);
           }
@@ -1332,9 +1329,7 @@ function $CompileProvider($provide, $$sanitizeUriProvider) {
       }
 
       nodeLinkFn.scope = newScopeDirective && newScopeDirective.scope === true;
-      nodeLinkFn.transcludeOnThisElement = hasTranscludeDirective;
-      nodeLinkFn.transclude = childTranscludeFn;
-
+      nodeLinkFn.transclude = hasTranscludeDirective && childTranscludeFn;
       previousCompileContext.hasElementTranscludeDirective = hasElementTranscludeDirective;
 
       // might be normal or delayed nodeLinkFn depending on if templateUrl is present
diff --git a/test/ng/compileSpec.js b/test/ng/compileSpec.js
index 2c23e6d9..4b0cfcd6 100755
--- a/test/ng/compileSpec.js
+++ b/test/ng/compileSpec.js
@@ -1436,78 +1436,6 @@ describe('$compile', function() {
         ));
 
 
-        describe('nested transcludes', function() {
-
-          beforeEach(module(function($compileProvider) {
-
-            $compileProvider.directive('noop', valueFn({}));
-
-            $compileProvider.directive('sync', valueFn({
-              template: '<div ng-transclude></div>',
-              transclude: true
-            }));
-
-            $compileProvider.directive('async', valueFn({
-              templateUrl: 'async',
-              transclude: true
-            }));
-
-            $compileProvider.directive('syncSync', valueFn({
-              template: '<div noop><div sync><div ng-transclude></div></div></div>',
-              transclude: true
-            }));
-
-            $compileProvider.directive('syncAsync', valueFn({
-              template: '<div noop><div async><div ng-transclude></div></div></div>',
-              transclude: true
-            }));
-
-            $compileProvider.directive('asyncSync', valueFn({
-              templateUrl: 'asyncSync',
-              transclude: true
-            }));
-
-            $compileProvider.directive('asyncAsync', valueFn({
-              templateUrl: 'asyncAsync',
-              transclude: true
-            }));
-
-          }));
-
-          beforeEach(inject(function($templateCache) {
-            $templateCache.put('async', '<div ng-transclude></div>');
-            $templateCache.put('asyncSync', '<div noop><div sync><div ng-transclude></div></div></div>');
-            $templateCache.put('asyncAsync', '<div noop><div async><div ng-transclude></div></div></div>');
-          }));
-
-
-          it('should allow nested transclude directives with sync template containing sync template', inject(function($compile, $rootScope) {
-            element = $compile('<div sync-sync>transcluded content</div>')($rootScope);
-            $rootScope.$digest();
-            expect(trim(element.text())).toEqual('transcluded content');
-          }));
-
-          it('should allow nested transclude directives with sync template containing async template', inject(function($compile, $rootScope) {
-            element = $compile('<div sync-async>transcluded content</div>')($rootScope);
-            $rootScope.$digest();
-            expect(trim(element.text())).toEqual('transcluded content');
-          }));
-
-          it('should allow nested transclude directives with async template containing sync template', inject(function($compile, $rootScope) {
-            element = $compile('<div async-sync>transcluded content</div>')($rootScope);
-            $rootScope.$digest();
-            expect(trim(element.text())).toEqual('transcluded content');
-          }));
-
-          it('should allow nested transclude directives with async template containing asynch template', inject(function($compile, $rootScope) {
-            element = $compile('<div async-async>transcluded content</div>')($rootScope);
-            $rootScope.$digest();
-            expect(trim(element.text())).toEqual('transcluded content');
-          }));
-        });
-
-
-
         it("should fail if replacing and template doesn't have a single root element", function() {
           module(function($exceptionHandlerProvider) {
             $exceptionHandlerProvider.mode('log');