Index: taxonomy_menu.module
===================================================================
RCS file: /cvs/drupal-contrib/contributions/modules/taxonomy_menu/taxonomy_menu.module,v
retrieving revision 1.19.2.2.2.68
diff -u -p -r1.19.2.2.2.68 taxonomy_menu.module
--- taxonomy_menu.module	20 Oct 2010 02:26:17 -0000	1.19.2.2.2.68
+++ taxonomy_menu.module	3 Nov 2010 01:50:53 -0000
@@ -793,11 +793,15 @@ function _taxonomy_menu_item($item) {
     $num = _taxonomy_menu_term_count($item['tid']);
 
     // if hide menu is selected and the term count is 0 and the term has no children then do not create the menu item
-    if ($num == 0 &&
-        variable_get('taxonomy_menu_hide_empty_terms_'. $item['vid'], FALSE) &&
-        !_taxonomy_menu_children_has_nodes($item['tid'], $item['vid'])) {
+    if (variable_get('taxonomy_menu_hide_empty_terms_'. $item['vid'], FALSE)) {
+        if (variable_get('taxonomy_menu_display_descendants_'. $item['vid'], FALSE) &&
+          ($num == 0 && !_taxonomy_menu_children_has_nodes($item['tid'], $item['vid']))) {
 
-        $item['remove'] = TRUE;
+          $item['remove'] = TRUE;
+        }
+        elseif ($num == 0) {
+          $item['remove'] = TRUE;
+        }
         return $item;
     }