Cache and RAM Limitations

Eddie Rebel writes in with this interesting question: "At work, we have some Compaq 850s with 2Gb of RAM. Recently I was told that the extra RAM we thew into them might not do any good, if the machine's cache memory was not lage enough to handle it. As I understood it the RAM is cached in the L2, but if you have only 64k of L2 it wouldn't be able to store more than 64Mb of RAM, and so on. Is there any truth in this, could someone please tell me or point me to some information about this?"