diff --git a/catalyst/base/stagebase.py b/catalyst/base/stagebase.py
index 62950b5..86ca230 100644
--- a/catalyst/base/stagebase.py
+++ b/catalyst/base/stagebase.py
@@ -1116,13 +1116,9 @@ class StageBase(TargetBase, ClearBase, GenBase):
 				for hostuseexpand in myuseexpandvars:
 					myf.write(hostuseexpand + '="' + ' '.join(myuseexpandvars[hostuseexpand]) + '"\n')
 
-			myf.write('PORTDIR="%s"\n' % self.settings['portdir'])
 			myf.write('DISTDIR="%s"\n' % self.settings['distdir'])
 			myf.write('PKGDIR="%s"\n' % self.settings['packagedir'])
 
-			# Setup the portage overlay
-			if "portage_overlay" in self.settings:
-				myf.write('PORTDIR_OVERLAY="/usr/local/portage"\n')
 
 			# Set default locale for system responses. #478382
 			myf.write(
@@ -1132,6 +1128,19 @@ class StageBase(TargetBase, ClearBase, GenBase):
 				'LC_MESSAGES=C\n')
 
 			myf.close()
+
+			# Create repos.conf (for the chroot)
+			repos_conf_path = normpath(self.settings["chroot_path"] + self.settings["repos_conf"])
+			cmd("rm -fr " + repos_conf_path, "Could not remove " + repos_conf_path, env=self.env)

Why the rm -fr???

+			cmd("mkdir -p " + repos_conf_path)

We are using ensure_dirs in catalyst, see fileops.py.  There is even a clear_dir()

+			with open(os.path.join(repos_conf_path, "gentoo.conf"), "w") as myf:
+				myf.write("[gentoo]\nlocation = %s\n" % self.settings["portdir"])
+			# Set up the local repository
+			if "portage_overlay" in self.settings:
+				with open(os.path.join(repos_conf_path, "local.conf"), "w") as myf:
+					myf.write("[local]\nlocation = %s\n" % self.settings["local_overlay"])
+
+
 			self.resume.enable("chroot_setup")
 
 	def fsscript(self):

That looks wrong, 2 blank lines then the self.resume.enable call, 
then one blank line between the next def below 


@@ -1171,13 +1180,12 @@ class StageBase(TargetBase, ClearBase, GenBase):
 				self.settings["chroot_path"]+"/etc/hosts",\
 				"Could not replace /etc/hosts",env=self.env)
 
-		# Remove our overlay
+		# Remove the local repository
 		if os.path.exists(self.settings["chroot_path"] + self.settings["local_overlay"]):
 			cmd("rm -rf " + self.settings["chroot_path"] + self.settings["local_overlay"],
 				"Could not remove " + self.settings["local_overlay"], env=self.env)
-			cmd("sed -i '/^PORTDIR_OVERLAY/d' "+self.settings["chroot_path"]+\
-				self.settings["make_conf"],\
-				"Could not remove PORTDIR_OVERLAY from make.conf",env=self.env)
+			cmd("rm -f" + os.path.join(normpath(self.settings["chroot_path"] + self.settings["repos_conf"]), "local.conf"),
+				"Could not remove local repository from repos.conf",env=self.env)

                                                                   /\  please run the pylint command Mike has made for catalyst
                                                                   missing one space after the comma
                                                                   
                                                                   
 		# Clean up old and obsoleted files in /etc
 		if os.path.exists(self.settings["stage_path"]+"/etc"):
diff --git a/catalyst/defaults.py b/catalyst/defaults.py
index c5162d6..28435e0 100644
--- a/catalyst/defaults.py
+++ b/catalyst/defaults.py
@@ -32,6 +32,7 @@ confdefaults={
 	"local_overlay": "/usr/local/portage",
 	"port_conf": "/etc/portage",
 	"make_conf": "%(port_conf)s/make.conf",
+	"repos_conf": "%(port_conf)s/repos.conf",
 	"options": set(),
 	"packagedir": "/usr/portage/packages",
 	"portdir": "/usr/portage",


The patch is mostly good.  Please fix those few things and re-submit.