diff --git a/contrib/redhat-eventlet.patch b/contrib/redhat-eventlet.patch
new file mode 100644
index 0000000000..cf2ff53d51
--- /dev/null
+++ b/contrib/redhat-eventlet.patch
@@ -0,0 +1,16 @@
+--- .nova-venv/lib/python2.6/site-packages/eventlet/green/subprocess.py.orig
+2011-05-25
+23:31:34.597271402 +0000
++++ .nova-venv/lib/python2.6/site-packages/eventlet/green/subprocess.py
+2011-05-25
+23:33:24.055602468 +0000
+@@ -32,7 +32,7 @@
+                     setattr(self, attr, wrapped_pipe)
+         __init__.__doc__ = subprocess_orig.Popen.__init__.__doc__
+
+-    def wait(self, check_interval=0.01):
++    def wait(self, check_interval=0.01, timeout=None):
+         # Instead of a blocking OS call, this version of wait() uses logic
+         # borrowed from the eventlet 0.2 processes.Process.wait() method.
+         try:
+
diff --git a/heat/tests/examples/__init__.py b/heat/tests/examples/__init__.py
new file mode 100644
index 0000000000..cc9a23905f
--- /dev/null
+++ b/heat/tests/examples/__init__.py
@@ -0,0 +1,5 @@
+def setup():
+    print "package setup complete"
+
+def teardown():
+    print "package teardown complete"
diff --git a/heat/tests/examples/tags.txt b/heat/tests/examples/tags.txt
new file mode 100644
index 0000000000..beece4ee53
--- /dev/null
+++ b/heat/tests/examples/tags.txt
@@ -0,0 +1,2 @@
+type
+area
diff --git a/heat/tests/examples/test1.py b/heat/tests/examples/test1.py
new file mode 100644
index 0000000000..f08f81fccd
--- /dev/null
+++ b/heat/tests/examples/test1.py
@@ -0,0 +1,32 @@
+###
+### an unparented test -- no encapsulating class, just any fn starting with
+### 'test'.
+### http://darcs.idyll.org/~t/projects/nose-demo/simple/tests/test_stuff.py.html
+###
+
+import sys
+import nose
+from nose.plugins.attrib import attr
+from nose import with_setup
+
+# module level
+def setUp():
+    print "test1 setup complete"
+
+def tearDown():
+    print "test1 teardown complete"
+
+@with_setup(setUp, tearDown) # test level
+@attr(tag=['example', 'func'])
+@attr(speed='fast')
+def test_a():
+    assert 'a' == 'a'
+    print "assert a"
+
+def test_b():
+    assert 'b' == 'b'
+    print "assert b"
+
+if __name__ == '__main__':
+    sys.argv.append(__file__)
+    nose.main()
diff --git a/heat/tests/examples/test2.py b/heat/tests/examples/test2.py
new file mode 100644
index 0000000000..9c3ec2cebb
--- /dev/null
+++ b/heat/tests/examples/test2.py
@@ -0,0 +1,26 @@
+###
+### non-unittest derived test -- class is instantiated, then functions
+### starting with 'test' are executed.
+### http://darcs.idyll.org/~t/projects/nose-demo/simple/tests/test_stuff.py.html
+###
+
+import sys
+import nose
+from nose.plugins.attrib import attr
+
+# sets attribute on all test methods
+@attr(tag=['example', 'class'])
+@attr(speed='fast')
+class TestClass:
+    def test2(self):
+        assert 'b' == 'b'
+        print "assert b"
+    def setUp(self):
+        print "test2 setup complete"
+    def tearDown(self):
+        print "test2 teardown complete"
+
+
+if __name__ == '__main__':
+    sys.argv.append(__file__)
+    nose.main()
diff --git a/heat/tests/examples/test3.py b/heat/tests/examples/test3.py
new file mode 100644
index 0000000000..4e2ddfbabd
--- /dev/null
+++ b/heat/tests/examples/test3.py
@@ -0,0 +1,25 @@
+###
+### the standard unittest-derived test
+### http://darcs.idyll.org/~t/projects/nose-demo/simple/tests/test_stuff.py.html
+###
+
+import sys
+import nose
+import unittest
+from nose.plugins.attrib import attr
+
+# sets attribute on all test methods
+@attr(tag=['example', 'unittest'])
+@attr(speed='fast')
+class ExampleTest(unittest.TestCase):
+    def test_a(self):
+        self.assert_(1 == 1)
+    def setUp(self):
+        print "test3 setup complete"
+    def tearDown(self):
+        print "test3 teardown complete"
+
+
+if __name__ == '__main__':
+    sys.argv.append(__file__)
+    nose.main()
diff --git a/heat/tests/testing-overview.txt b/heat/tests/testing-overview.txt
new file mode 100644
index 0000000000..0c098180dc
--- /dev/null
+++ b/heat/tests/testing-overview.txt
@@ -0,0 +1,122 @@
+Heat testing
+------------
+
+All tests are to be placed in the heat/tests directory. The directory is
+organized by test type (unit, functional, etc). Within each type
+directory one may create another directory for additional test files as
+well as a separate __init__.py, which allows setup and teardown code to
+be shared with the tests present in the same directory.
+
+An example directory structure illustrating the above:
+
+heat/tests
+|-- examples
+|   |-- __init__.py <-- tests1-3 will execute the fixtures (setup and
+|   |-- test1.py        teardown routines) only once
+|   |-- test2.py
+|   |-- test3.py
+|-- __init__.py
+`-- unit
+    |-- __init__.py
+    |-- test_template_convert.py
+
+If a given test has no overlapping requirements (variables or same
+routines) a new test does not need to create a subdirectory under the
+test type.
+
+Implementing a test
+-------------------
+
+Nose, the testing framework - http://pypi.python.org/pypi/nose, finds on
+demand available tests to run. The name of the file must contain "test"
+or "Test" at a word boundary. The recommended format is for the test to
+be named test_<NAME>.
+
+There are many different ways to write a test. Three different ways are
+present in the tests/examples directory. The differences are slight
+enough to just describe the make up of just one test.
+
+---
+Example 1:
+
+import sys
+import nose
+from nose.plugins.attrib import attr
+from nose import with_setup
+
+# module level
+def setUp():
+    print "test1 setup complete"
+
+def tearDown():
+    print "test1 teardown complete"
+
+@with_setup(setUp, tearDown) # test level
+@attr(tag=['example', 'func'])
+def test_a():
+    assert 'a' == 'a'
+    print "assert a"
+
+def test_b():
+    assert 'b' == 'b'
+    print "assert b"
+
+# allows testing of the test directly, shown below
+if __name__ == '__main__':
+    sys.argv.append(__file__)
+    nose.main()
+---
+
+Example 1 illustrates fixture execution at the test, module, and package
+level:
+
+$ python test1.py -s
+package setup complete
+test1 setup complete
+test1 setup complete
+assert a
+test1 teardown complete
+.assert b
+.test1 teardown complete
+package teardown complete
+
+----------------------------------------------------------------------
+Ran 2 tests in 0.001s
+
+OK
+
+
+All fixtures are optional. In the above output you can trace the order
+execution of the fixtures relative to the tests. Fixtures at the class
+level are present in example 2, which consists of simply defining them
+within the class. 
+
+Note the attribute decorator with a list of values, which functionality
+is provided via the attributeselector plugin. This "tag" allows running
+tests all matching the assigned attribute(s). Tests should always
+include the tag attribute with at least these values: <test type>,
+<test area>. Also an attribute of speed should be used with a value of
+either slow, normal, or fast. Following this convention allows for finer
+granular testing without having to find the specific tests to run.
+
+Running the tests
+-----------------
+
+There is a run_tests.sh script in the top level of the tree. The script
+will by default execute all found tests, but can be modified with the
+tag argument:
+
+$ ./run_tests.sh -V -a tag=example  # (runs all the examples)
+
+There are two important options provided by the run_tests.sh script that
+should have special attention. The '--virtual-env' or '-V' will build
+and run all the tests inside of an isolated python environment located
+in the .venv directory. It's sort of like mock just for python :)
+
+The other option of note is the '--pep8' or '-p' flag. This is a python
+style checker that is good to run periodically. Pep8 is automatically
+executed when tests are run inside the virtual environment since pep8 is
+intentionally installed.
+
+Please see ./run_tests.sh -h for future enhancements and/or minor
+non-documented functionality.
diff --git a/heat/tests/unit/test_template_convert.py b/heat/tests/unit/test_template_convert.py
deleted file mode 100644
index 9934802937..0000000000
--- a/heat/tests/unit/test_template_convert.py
+++ /dev/null
@@ -1,41 +0,0 @@
-# vim: tabstop=4 shiftwidth=4 softtabstop=4
-
-# Copyright 2011 Red Hat, Inc.
-#
-#    Licensed under the Apache License, Version 2.0 (the "License"); you may
-#    not use this file except in compliance with the License. You may obtain
-#    a copy of the License at
-#
-#         http://www.apache.org/licenses/LICENSE-2.0
-#
-#    Unless required by applicable law or agreed to in writing, software
-#    distributed under the License is distributed on an "AS IS" BASIS, WITHOUT
-#    WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied. See the
-#    License for the specific language governing permissions and limitations
-#    under the License.
-
-import json
-import unittest
-
-from heat.engine.json2capexml import *
-
-class ParseTestCase(unittest.TestCase):
-
-    def setUp(self):
-        pass
-
-    def tearDown(self):
-        pass
-
-    def test_01(self):
-        done=False
-
-        with open('templates/WordPress_Single_Instance.template') as f:
-            blob = json.load(f)
-            cape_transformer = Json2CapeXml(blob, 'WordPress_Single_Instance')
-            cape_transformer.convert()
-            print cape_transformer.get_xml()
-            done=True
-
-        self.assertTrue(done)
-
diff --git a/run_tests.sh b/run_tests.sh
index e0db6ee0e8..009deec503 100755
--- a/run_tests.sh
+++ b/run_tests.sh
@@ -7,7 +7,7 @@ function usage {
   echo "  -V, --virtual-env        Always use virtualenv.  Install automatically if not present"
   echo "  -N, --no-virtual-env     Don't use virtualenv.  Run tests in local environment"
   echo "  -f, --force              Force a clean re-build of the virtual environment. Useful when dependencies have been added."
-  echo "  --unittests-only         Run unit tests only, exclude functional tests."
+  echo "  --unittests-only         Run unit tests only."
   echo "  -p, --pep8               Just run pep8"
   echo "  -h, --help               Print this usage message"
   echo ""
@@ -19,11 +19,12 @@ function usage {
 
 function process_option {
   case "$1" in
-    -h|--help) usage;;
     -V|--virtual-env) let always_venv=1; let never_venv=0;;
     -N|--no-virtual-env) let always_venv=0; let never_venv=1;;
     -f|--force) let force=1;;
-    --unittests-only) noseargs="$noseargs --exclude-dir=heat/tests/functional";;
+    --unittests-only) noseargs="$noseargs -a tag=unit";;
+    -p|--pep8) let just_pep8=1;;
+    -h|--help) usage;;
     *) noseargs="$noseargs $1"
   esac
 }
@@ -41,13 +42,19 @@ for arg in "$@"; do
   process_option $arg
 done
 
+NOSETESTS="python run_tests.py $noseargs"
+
 function run_tests {
   # Just run the test suites in current environment
-  ${wrapper} rm -f tests.sqlite
   ${wrapper} $NOSETESTS 2> run_tests.err.log
 }
 
-NOSETESTS="python run_tests.py $noseargs"
+function run_pep8 {
+  echo "Running pep8 ..."
+  PEP8_OPTIONS="--exclude=$PEP8_EXCLUDE --repeat"
+  PEP8_INCLUDE="bin/*.py heat tools setup.py run_tests.py"
+  ${wrapper} pep8 $PEP8_OPTIONS $PEP8_INCLUDE
+}
 
 if [ $never_venv -eq 0 ]
 then
@@ -69,11 +76,20 @@ then
       if [ "x$use_ve" = "xY" -o "x$use_ve" = "x" -o "x$use_ve" = "xy" ]; then
         # Install the virtualenv and run the test suite in it
         python tools/install_venv.py
-		    wrapper=${with_venv}
+        wrapper=${with_venv}
       fi
     fi
   fi
 fi
 
+if [ $just_pep8 -eq 1 ]; then
+  run_pep8
+  exit
+fi
+
 run_tests || exit
 
+if [ -z "$noseargs" ]; then
+  run_pep8
+fi
+
diff --git a/tools/install_venv.py b/tools/install_venv.py
new file mode 100644
index 0000000000..ca03fcb096
--- /dev/null
+++ b/tools/install_venv.py
@@ -0,0 +1,246 @@
+
+# vim: tabstop=4 shiftwidth=4 softtabstop=4
+
+# Copyright 2010 United States Government as represented by the
+# Administrator of the National Aeronautics and Space Administration.
+# All Rights Reserved.
+#
+# Copyright 2010 OpenStack, LLC
+#
+#    Licensed under the Apache License, Version 2.0 (the "License"); you may
+#    not use this file except in compliance with the License. You may obtain
+#    a copy of the License at
+#
+#         http://www.apache.org/licenses/LICENSE-2.0
+#
+#    Unless required by applicable law or agreed to in writing, software
+#    distributed under the License is distributed on an "AS IS" BASIS, WITHOUT
+#    WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied. See the
+#    License for the specific language governing permissions and limitations
+#    under the License.
+
+"""
+Installation script for Heat's development virtualenv
+"""
+
+import optparse
+import os
+import subprocess
+import sys
+
+
+ROOT = os.path.dirname(os.path.dirname(os.path.realpath(__file__)))
+VENV = os.path.join(ROOT, '.venv')
+PIP_REQUIRES = os.path.join(ROOT, 'tools', 'pip-requires')
+TEST_REQUIRES = os.path.join(ROOT, 'tools', 'test-requires')
+PY_VERSION = "python%s.%s" % (sys.version_info[0], sys.version_info[1])
+
+
+def die(message, *args):
+    print >> sys.stderr, message % args
+    sys.exit(1)
+
+
+def check_python_version():
+    if sys.version_info < (2, 6):
+        die("Need Python Version >= 2.6")
+
+
+def run_command_with_code(cmd, redirect_output=True, check_exit_code=True):
+    """
+    Runs a command in an out-of-process shell, returning the
+    output of that command.  Working directory is ROOT.
+    """
+    if redirect_output:
+        stdout = subprocess.PIPE
+    else:
+        stdout = None
+
+    proc = subprocess.Popen(cmd, cwd=ROOT, stdout=stdout)
+    output = proc.communicate()[0]
+    if check_exit_code and proc.returncode != 0:
+        die('Command "%s" failed.\n%s', ' '.join(cmd), output)
+    return (output, proc.returncode)
+
+
+def run_command(cmd, redirect_output=True, check_exit_code=True):
+    return run_command_with_code(cmd, redirect_output, check_exit_code)[0]
+
+
+class Distro(object):
+
+    def check_cmd(self, cmd):
+        return bool(run_command(['which', cmd], check_exit_code=False).strip())
+
+    def install_virtualenv(self):
+        if self.check_cmd('virtualenv'):
+            return
+
+        if self.check_cmd('easy_install'):
+            print 'Installing virtualenv via easy_install...',
+            if run_command(['easy_install', 'virtualenv']):
+                print 'Succeeded'
+                return
+            else:
+                print 'Failed'
+
+        die('ERROR: virtualenv not found.\n\nHeat development'
+            ' requires virtualenv, please install it using your'
+            ' favorite package management tool')
+
+    def post_process(self):
+        """Any distribution-specific post-processing gets done here.
+
+        In particular, this is useful for applying patches to code inside
+        the venv."""
+        pass
+
+
+class Fedora(Distro):
+    """This covers all Fedora-based distributions.
+
+    Includes: Fedora, RHEL, CentOS, Scientific Linux"""
+
+    def check_pkg(self, pkg):
+        return run_command_with_code(['rpm', '-q', pkg],
+                                     check_exit_code=False)[1] == 0
+
+    def yum_install(self, pkg, **kwargs):
+        print "Attempting to install '%s' via yum" % pkg
+        run_command(['sudo', 'yum', 'install', '-y', pkg], **kwargs)
+
+    def apply_patch(self, originalfile, patchfile):
+        run_command(['patch', originalfile, patchfile])
+
+    def install_virtualenv(self):
+        if self.check_cmd('virtualenv'):
+            return
+
+        if not self.check_pkg('python-virtualenv'):
+            self.yum_install('python-virtualenv', check_exit_code=False)
+
+        super(Fedora, self).install_virtualenv()
+
+    def post_process(self):
+        """Workaround for a bug in eventlet.
+
+        This currently affects RHEL6.1, but the fix can safely be
+        applied to all RHEL and Fedora distributions.
+
+        This can be removed when the fix is applied upstream
+
+        Nova: https://bugs.launchpad.net/nova/+bug/884915
+        Upstream: https://bitbucket.org/which_linden/eventlet/issue/89"""
+
+        # Install "patch" program if it's not there
+        if not self.check_pkg('patch'):
+            self.yum_install('patch')
+
+        # Apply the eventlet patch
+        self.apply_patch(os.path.join(VENV, 'lib', PY_VERSION, 'site-packages',
+                                      'eventlet/green/subprocess.py'),
+                         'contrib/redhat-eventlet.patch')
+
+
+def get_distro():
+    if os.path.exists('/etc/fedora-release') or \
+       os.path.exists('/etc/redhat-release'):
+        return Fedora()
+    else:
+        return Distro()
+
+
+def check_dependencies():
+    get_distro().install_virtualenv()
+
+
+def create_virtualenv(venv=VENV, no_site_packages=True):
+    """Creates the virtual environment and installs PIP only into the
+    virtual environment
+    """
+    print 'Creating venv...',
+    if no_site_packages:
+        run_command(['virtualenv', '-q', '--no-site-packages', VENV])
+    else:
+        run_command(['virtualenv', '-q', VENV])
+    print 'done.'
+    print 'Installing pip in virtualenv...',
+    if not run_command(['tools/with_venv.sh', 'easy_install',
+                        'pip>1.0']).strip():
+        die("Failed to install pip.")
+    print 'done.'
+
+
+def pip_install(*args):
+    run_command(['tools/with_venv.sh',
+                 'pip', 'install', '--upgrade'] + list(args),
+                redirect_output=False)
+
+
+def install_dependencies(venv=VENV):
+    print 'Installing dependencies with pip (this can take a while)...'
+
+    # First things first, make sure our venv has the latest pip and distribute.
+    pip_install('pip')
+    pip_install('distribute')
+
+    # Install greenlet by hand - just listing it in the requires file does not
+    # get it in stalled in the right order
+    pip_install('greenlet')
+
+    pip_install('-r', PIP_REQUIRES)
+    pip_install('-r', TEST_REQUIRES)
+
+    # Tell the virtual env how to "import nova"
+    #pthfile = os.path.join(venv, "lib", PY_VERSION, "site-packages",
+    #                    "nova.pth")
+    #f = open(pthfile, 'w')
+    #f.write("%s\n" % ROOT)
+
+
+def post_process():
+    get_distro().post_process()
+
+
+def print_help():
+    help = """
+    Heat development environment setup is complete.
+
+    Heat development uses virtualenv to track and manage Python dependencies
+    while in development and testing.
+
+    To activate the Heat virtualenv for the extent of your current shell
+    session you can run:
+
+    $ source .venv/bin/activate
+
+    Or, if you prefer, you can run commands in the virtualenv on a case by case
+    basis by running:
+
+    $ tools/with_venv.sh <your command>
+
+    Also, make test will automatically use the virtualenv.
+    """
+    print help
+
+
+def parse_args():
+    """Parse command-line arguments"""
+    parser = optparse.OptionParser()
+    parser.add_option("-n", "--no-site-packages", dest="no_site_packages",
+        default=False, action="store_true",
+        help="Do not inherit packages from global Python install")
+    return parser.parse_args()
+
+
+def main(argv):
+    (options, args) = parse_args()
+    check_python_version()
+    check_dependencies()
+    create_virtualenv(no_site_packages=options.no_site_packages)
+    install_dependencies()
+    post_process()
+    print_help()
+
+if __name__ == '__main__':
+    main(sys.argv)
diff --git a/tools/pip-requires b/tools/pip-requires
new file mode 100644
index 0000000000..71542f24bc
--- /dev/null
+++ b/tools/pip-requires
@@ -0,0 +1,16 @@
+# The greenlet package must be compiled with gcc and needs
+# the Python.h headers. Make sure you install the python-dev
+# package to get the right headers...
+greenlet>=0.3.1
+
+eventlet>=0.9.12
+PasteDeploy
+routes
+webob==1.0.8
+argparse
+swift
+sqlalchemy-migrate>=0.7
+httplib2
+kombu
+iso8601>=0.1.4
+python-novaclient
diff --git a/tools/test-requires b/tools/test-requires
new file mode 100644
index 0000000000..bf05a9bf43
--- /dev/null
+++ b/tools/test-requires
@@ -0,0 +1,8 @@
+# Packages needed for dev testing
+distribute>=0.6.24
+
+coverage
+nose
+nosexcover
+openstack.nose_plugin
+pep8==0.6.1
diff --git a/tools/with_venv.sh b/tools/with_venv.sh
new file mode 100755
index 0000000000..c8d2940fc7
--- /dev/null
+++ b/tools/with_venv.sh
@@ -0,0 +1,4 @@
+#!/bin/bash
+TOOLS=`dirname $0`
+VENV=$TOOLS/../.venv
+source $VENV/bin/activate && $@