diff --git a/lib/fsevents/stream.rb b/lib/fsevents/stream.rb
index de5b136..df145ca 100644
--- a/lib/fsevents/stream.rb
+++ b/lib/fsevents/stream.rb
@@ -63,10 +63,13 @@ def update_last_event
       when :mtime
         @last_event = Time.now
       when :cache
-        paths.each do |path|
+        cache_paths = paths.dup
+        cache_paths.each do |path|
           dirs[path] = {}
           Dir["#{path}/*"].each do |file|
-            dirs[path][file] = File::Stat.new(file)
+            stat = File::Stat.new(file)
+            dirs[path][file] = stat
+            cache_paths.push(file) if stat.directory?
           end
         end
       end
diff --git a/spec/stream_spec.rb b/spec/stream_spec.rb
index fb7d67d..5016fcc 100644
--- a/spec/stream_spec.rb
+++ b/spec/stream_spec.rb
@@ -436,7 +436,7 @@
       before :each do
         @stream.stubs(:mode).returns(:cache)
         @files = Array.new(5) { |i|  stub("file #{i+1}") }
-        @stats = Array.new(5) { |i|  stub("file #{i+1} stat") }
+        @stats = Array.new(5) { |i|  stub("file #{i+1} stat", :directory? => false) }
         
         @files.zip(@stats).each do |file, stat|
           File::Stat.stubs(:new).with(file).returns(stat)
@@ -492,6 +492,28 @@
         end
         @stream.update_last_event
       end
+      
+      it 'should see if there are any subdirectories' do
+        @stats.each { |stat|  stat.expects(:directory?) }
+        @stream.update_last_event
+      end
+      
+      it 'should cache subdirectories' do
+        subdir_path = '/sub/dir/path'
+        @files[3].stubs(:to_s).returns(subdir_path)
+        @stats[3].stubs(:directory?).returns(true)
+        Dir.expects(:[]).with("#{subdir_path}/*").returns([])
+        @stream.update_last_event
+      end
+      
+      it 'should not add cached subdirectories to the watched paths' do
+        subdir_path = '/sub/dir/path'
+        @files[3].stubs(:to_s).returns(subdir_path)
+        @stats[3].stubs(:directory?).returns(true)
+        Dir.stubs(:[]).with("#{subdir_path}/*").returns([])
+        @stream.update_last_event
+        @stream.paths.should_not include(@files[3])
+      end
     end
   end