diff --git a/ChangeLog b/ChangeLog
index a1a3aab..912f7b7 100644
--- a/ChangeLog
+++ b/ChangeLog
@@ -20,6 +20,10 @@
   gen_initramfs.sh:
   Make errors stand out more
 
+  22 Mar 2012; Sebastian Pipping <sping@gentoo.org> defaults/initrd.scripts,
+  defaults/linuxrc:
+  Fix docache (bug #397309)
+
   22 Mar 2012; Sebastian Pipping <sping@gentoo.org> genkernel:
   Bump version to 3.4.26
 
diff --git a/defaults/initrd.scripts b/defaults/initrd.scripts
index 4e0e123..6d27a00 100755
--- a/defaults/initrd.scripts
+++ b/defaults/initrd.scripts
@@ -191,12 +191,11 @@ cache_cd_contents() {
 			cp -a ${CDROOT_PATH}/${LOOP} ${NEW_ROOT}/mnt/${LOOP}
 			if [ $? -ne 0 ]
 			then
-				bad_msg "Failed to cache the loop file! Lack of space?"
+				warn_msg "Failed to cache the loop file! Lack of RAM?"
+				rm -rf ${NEW_ROOT}/mnt/${LOOP} 2>/dev/null
 				rm -rf ${NEW_ROOT}/mnt/livecd.* 2>/dev/null
 				rm -rf ${NEW_ROOT}/mnt/image.* 2>/dev/null
 				rm -rf ${NEW_ROOT}/mnt/zisofs 2>/dev/null
-			else
-				LOOPEXT='../'
 			fi
 		fi
 	fi
diff --git a/defaults/linuxrc b/defaults/linuxrc
index 5932024..9ac2c7c 100755
--- a/defaults/linuxrc
+++ b/defaults/linuxrc
@@ -627,7 +627,12 @@ then
 		then
 			if [ "${USE_AUFS_NORMAL}" != '1' ]; then
 				good_msg 'Mounting squashfs filesystem'
-				mount -t squashfs -o loop,ro "${CDROOT_PATH}/${LOOPEXT}${LOOP}" "${NEW_ROOT}/mnt/livecd" || {
+				_CACHED_SQUASHFS_PATH="${NEW_ROOT}/mnt/${LOOP}"
+				_squashfs_path="${CDROOT_PATH}/${LOOPEXT}${LOOP}"  # Default to uncached
+				# Upgrade to cached version if possible
+				[ "${DO_cache}" -a -f "${_CACHED_SQUASHFS_PATH}" ] \
+						&& _squashfs_path=${_CACHED_SQUASHFS_PATH}
+				mount -t squashfs -o loop,ro "${_squashfs_path}" "${NEW_ROOT}/mnt/livecd" || {
 					bad_msg "Squashfs filesystem could not be mounted, dropping into shell."
 					if [ -e /proc/filesystems ]; then
 						fgrep -q squashfs /proc/filesystems || \