diff --git a/lib/test-driver/Machine.pm b/lib/test-driver/Machine.pm
index df1ace15453..85ef80f0d37 100644
--- a/lib/test-driver/Machine.pm
+++ b/lib/test-driver/Machine.pm
@@ -1,9 +1,12 @@
 package Machine;
 
 use strict;
+use threads;
+use Thread::Queue;
 use Socket;
 use IO::Handle;
 use POSIX qw(dup2);
+use FileHandle;
 
 
 # Stuff our PID in the multicast address/port to prevent collissions
@@ -26,6 +29,7 @@ sub new {
         booted => 0,
         pid => 0,
         connected => 0,
+        connectedQueue => Thread::Queue->new(),
         socket => undef,
         stateDir => "$tmpDir/$name",
     };
@@ -62,14 +66,15 @@ sub start {
 
     $self->log("starting vm");
 
+    my ($read, $write) = FileHandle::pipe;
+
     my $pid = fork();
     die if $pid == -1;
 
     if ($pid == 0) {
-        my $name = $self->{name};
-        open LOG, "| sed --unbuffered 's|^|$name console: |'" or die;
-        dup2(fileno(LOG), fileno(STDOUT));
-        dup2(fileno(LOG), fileno(STDERR));
+        close $read;
+        dup2(fileno($write), fileno(STDOUT));
+        dup2(fileno($write), fileno(STDERR));
         open NUL, "</dev/null" or die;
         dup2(fileno(NUL), fileno(STDIN));
         $ENV{TMPDIR} = $self->{stateDir};
@@ -79,7 +84,22 @@ sub start {
         exec $self->{script};
         die;
     }
-    
+
+    close $write;
+
+    threads->create(\&processQemuOutput)->detach;
+
+    sub processQemuOutput {
+        $/ = "\r\n";
+        while (<$read>) {
+            chomp;
+            print STDERR $self->name, "# $_\n";
+            $self->{connectedQueue}->enqueue(1) if $_ eq "===UP===";
+        }
+        # If the child dies, wake up connect().
+        $self->{connectedQueue}->enqueue(1);
+    }
+
     $self->log("vm running as pid $pid");
     $self->{pid} = $pid;
     $self->{booted} = 1;
@@ -92,12 +112,9 @@ sub connect {
 
     $self->start;
 
-    my $try = 0;
-    while (1) {
-        last if -e ($self->{stateDir} . "/running");
-        sleep 1;
-        die ("VM " . $self->{name} . " timed out") if $try++ > 300;
-    }
+    # Wait until the processQemuOutput thread signals that the machine
+    # is up.
+    $self->{connectedQueue}->dequeue();
 
     while (1) {
         $self->log("trying to connect");
diff --git a/modules/system/boot/stage-1-init.sh b/modules/system/boot/stage-1-init.sh
index db712f48ee1..e0d7869f910 100644
--- a/modules/system/boot/stage-1-init.sh
+++ b/modules/system/boot/stage-1-init.sh
@@ -7,13 +7,15 @@ export PATH=@extraUtils@/bin:@klibc@/bin
 
 
 fail() {
+    if [ -n "$panicOnFail" ]; then exit 1; fi
+    
     # If starting stage 2 failed, allow the user to repair the problem
     # in an interactive shell.
     cat <<EOF
 
 An error occured in stage 1 of the boot process, which must mount the
 root filesystem on \`$targetRoot' and then start stage 2.  Press one
-of the following keys within $timeout seconds:
+of the following keys:
 
   i) to launch an interactive shell;
   f) to start an interactive shell having pid 1 (needed if you want to
@@ -74,6 +76,9 @@ for o in $(cat /proc/cmdline); do
         debug1mounts) # stop after mounting file systems
             debug1mounts=1
             ;;
+        stage1panic)
+            panicOnFail=1
+            ;;
     esac
 done
 
diff --git a/modules/testing/test-instrumentation.nix b/modules/testing/test-instrumentation.nix
index 4c6b1a54afd..da664793a4c 100644
--- a/modules/testing/test-instrumentation.nix
+++ b/modules/testing/test-instrumentation.nix
@@ -14,9 +14,8 @@ with pkgs.lib;
         
         preStart =
           ''
-            eval $(cat /proc/cmdline)
-            echo "guest running, will write in $hostTmpDir on host" > /dev/ttyS0
-            touch /hostfs/$hostTmpDir/running
+            echo "guest running" > /dev/ttyS0
+            echo "===UP===" > dev/ttyS0
           '';
           
         exec = "${pkgs.socat}/bin/socat tcp-listen:514,fork exec:/bin/sh,stderr";
@@ -45,6 +44,10 @@ with pkgs.lib;
     # If the kernel has been built with coverage instrumentation, make
     # it available under /proc/gcov.
     boot.kernelModules = [ "gcov-proc" ];
+
+    # Panic if an error occurs in stage 1 (rather than waiting for
+    # user intervention). 
+    boot.kernelParams = [ "stage1panic" ];
       
   };