diff --git a/build_image.sh b/build_image.sh
index 0ce4fd7a8e..363d45cfa9 100755
--- a/build_image.sh
+++ b/build_image.sh
@@ -146,7 +146,7 @@ if [ ! -e /etc/mtab ]; then
   sudo touch /etc/mtab
 fi
 UUID=`uuidgen`
-DISK_LABEL=C-$CHROMEOS_VERSION
+DISK_LABEL=C-$CHROMEOS_VERSION_STRING
 LOOP_DEV=`sudo losetup -f`
 sudo losetup "$LOOP_DEV" "$ROOT_FS_IMG"
 sudo mkfs.ext3 "$LOOP_DEV"
@@ -258,9 +258,9 @@ dd if="$SYSLINUX_MBR" of="$MBR_IMG" bs=512 count=1 conv=sync
 # Create a partition table in the MBR.
 NUM_SECTORS=$((`stat --format="%s" "$ROOT_FS_IMG"` / 512))
 sudo sfdisk -H64 -S32 -uS -f "$MBR_IMG" <<EOF
-,$NUM_SECTORS,L,*,
 ,$NUM_SECTORS,L,-,
 ,$NUM_SECTORS,S,-,
+,$NUM_SECTORS,L,*,
 ;
 EOF
 
diff --git a/customize_rootfs.sh b/customize_rootfs.sh
index ee03c81e48..73e37239d2 100755
--- a/customize_rootfs.sh
+++ b/customize_rootfs.sh
@@ -127,6 +127,55 @@ EOF
 update-initramfs -u
 fi
 
+cat <<EOF > /etc/network/interfaces
+auto lo
+iface lo inet loopback
+EOF
+
+cat <<EOF > /etc/resolv.conf
+# Use the connman dns proxy.
+nameserver 127.0.0.1
+EOF
+chmod a-wx /etc/resolv.conf
+
+# Set timezone symlink
+rm -f /etc/localtime
+ln -s /mnt/stateful_partition/etc/localtime /etc/localtime
+
+# The postinst script is called after an AutoUpdate or USB install.
+# the quotes around EOF mean don't evaluate anything inside this HEREDOC.
+# TODO(adlr): set this file up in a package rather than here
+cat <<"EOF" > /usr/sbin/chromeos-postinst
+#!/bin/sh
+
+set -e
+
+# update /boot/extlinux.conf
+INSTALL_ROOT=`dirname "$0"`
+INSTALL_DEV="$1"
+STATEFUL_PARTITION=$(echo "$INSTALL_DEV" | tr 1234 4411)
+
+# set default label to chromeos-hd
+sed -i 's/^DEFAULT .*/DEFAULT chromeos-hd/' "$INSTALL_ROOT"/boot/extlinux.conf
+sed -i "{ s:HDROOT:$INSTALL_DEV: }" "$INSTALL_ROOT"/boot/extlinux.conf
+
+# update /etc/fstab
+sed -i "s|^[^ ]* /mnt/stateful_partition |\
+$STATEFUL_PARTITION /mnt/stateful_partition |" "$INSTALL_ROOT"/etc/fstab
+
+# NOTE: The stateful partition will not be mounted when this is
+# called at USB-key install time.
+EOF
+chmod 0755 /usr/sbin/chromeos-postinst
+
+ln -s /usr/sbin/chromeos-postinst /postinst
+
+
+# make a mountpoint for stateful partition
+sudo mkdir -p "$ROOTFS_DIR"/mnt/stateful_partition
+sudo chmod 0755 "$ROOTFS_DIR"/mnt
+sudo chmod 0755 "$ROOTFS_DIR"/mnt/stateful_partition
+
 # If we don't create generic udev rules, then udev will try to save the
 # history of various devices (i.e. always associate a given device and MAC
 # address with the same wlan number). As we use a keyfob across different
@@ -361,6 +410,11 @@ mknod --mode=0660 "$UDEV_DEVICES"/sda1 b 8 1
 mknod --mode=0660 "$UDEV_DEVICES"/sda2 b 8 2
 mknod --mode=0660 "$UDEV_DEVICES"/sda3 b 8 3
 mknod --mode=0660 "$UDEV_DEVICES"/sda4 b 8 4
+mknod --mode=0660 "$UDEV_DEVICES"/sdb  b 8 16
+mknod --mode=0660 "$UDEV_DEVICES"/sdb1 b 8 17
+mknod --mode=0660 "$UDEV_DEVICES"/sdb2 b 8 18
+mknod --mode=0660 "$UDEV_DEVICES"/sdb3 b 8 19
+mknod --mode=0660 "$UDEV_DEVICES"/sdb4 b 8 20
 mknod --mode=0660 "$UDEV_DEVICES"/fb0 c 29 0
 mknod --mode=0660 "$UDEV_DEVICES"/dri/card0 c 226 0
 mknod --mode=0640 "$UDEV_DEVICES"/input/mouse0 c 13 32
@@ -420,8 +474,11 @@ done
 
 # Add some tmpfs filesystems to fstab to enable session semantics
 cat <<EOF >> /etc/fstab
+/dev/root / rootfs ro 0 0
 tmpfs /tmp tmpfs rw,nosuid,nodev 0 0
-tmphomedir /home/chronos tmpfs rw,nosuid,nodev 0 0
+LABEL=C-STATE /mnt/stateful_partition ext3 rw 0 1
+/mnt/stateful_partition/home /home bind defaults,bind 0 0
+/mnt/stateful_partition/var /var bind defaults,bind 0 0
 EOF
 
 # List all packages still installed post-pruning
diff --git a/image_to_usb.sh b/image_to_usb.sh
index 2c2db22d64..83b31e9ad6 100755
--- a/image_to_usb.sh
+++ b/image_to_usb.sh
@@ -64,16 +64,38 @@ then
       exit 1
     fi
   fi
+  
+  STATE_PART="$FLAGS_to"1
+  ROOT_PART="$FLAGS_to"3
 
-  sudo bash -c "cat \"${FLAGS_from}/mbr.image\" \
-    \"${FLAGS_from}/rootfs.image\" \
-    | dd of=\"$FLAGS_to\" bs=4M"
+  sudo dd if="${FLAGS_from}/mbr.image" of="$FLAGS_to"
+  sync
+  sudo partprobe "$FLAGS_to"
+  sync
+  sudo dd if="${FLAGS_from}/rootfs.image" of="$ROOT_PART" bs=4M
+  sudo mkfs.ext3 -F -L C-STATE "$STATE_PART"
   sync
   echo "Done."
 else
   # Output to a file, so just cat the source images together
+
+  PART_SIZE=$(stat -c%s "${FLAGS_from}/rootfs.image")
+
+  echo "Creating empty stateful partition"
+  dd if=/dev/zero of="${FLAGS_from}/stateful_partition.image" bs=1 count=1 \
+      seek=$(($PART_SIZE - 1))
+  mkfs.ext3 -F -L C-STATE "${FLAGS_from}/stateful_partition.image"
+  
+  # Create a sparse output file
+  dd if=/dev/zero of="${FLAGS_to}" bs=1 count=1 \
+      seek=$(( ($PART_SIZE * 2) + 512 - 1))
+
   echo "Copying USB image to file ${FLAGS_to}..."
-  cat "${FLAGS_from}/mbr.image" "${FLAGS_from}/rootfs.image" > "$FLAGS_to"
+
+  dd if="${FLAGS_from}/mbr.image" of="$FLAGS_to" conv=notrunc
+  dd if="${FLAGS_from}/stateful_partition.image" of="$FLAGS_to" seek=1 bs=512 \
+      conv=notrunc
+  cat "${FLAGS_from}/rootfs.image" >> "$FLAGS_to"
 
   echo "Done.  To copy to USB keyfob, outside the chroot, do something like:"
   echo "   sudo dd if=${FLAGS_to} of=/dev/sdb bs=4M"
diff --git a/mk_memento_images.sh b/mk_memento_images.sh
index 2bd6cad7d3..2df1a72a5c 100755
--- a/mk_memento_images.sh
+++ b/mk_memento_images.sh
@@ -22,88 +22,14 @@ then
   exit 1
 fi
 
-FINAL_OUT_FILE=$(dirname "$1")/update.tgz
+FINAL_OUT_FILE=$(dirname "$1")/update.gz
 UNCOMPRESSED_OUT_FILE="$FINAL_OUT_FILE.uncompressed"
-MOUNTPOINT="/tmp/mk_memento_images_mntpoint"
 
 ORIGINAL_LABEL=$(sudo /sbin/e2label "$1")
 
 # copy original over to the new file
 cp "$1" "$UNCOMPRESSED_OUT_FILE"
 
-# next steps require fs to be mounted. unmount if we die early
-function cleanup_mount {
-  sudo umount "$MOUNTPOINT" || true
-  rmdir "$MOUNTPOINT"
-}
-mkdir -p "$MOUNTPOINT"
-sudo mount -o loop "$UNCOMPRESSED_OUT_FILE" "$MOUNTPOINT"
-trap cleanup_mount INT TERM EXIT
-
-# make an empty postinst script. the quotes around EOF mean don't evaluate
-# anything inside this HEREDOC.
-cat <<"EOF" | sudo dd of="$MOUNTPOINT/postinst"
-#!/bin/sh
-
-set -e
-
-# see if we're booted from hard drive or USB. We should not have booted from
-# USB.
-
-INITRD=$(cat /proc/cmdline | tr ' ' '\n' | grep ^initrd= | wc -l)
-if [ "0" != "$INITRD" ]
-then
-  # we're usb. abort.
-  exit 1
-fi
-
-# update /boot/extlinux.conf
-
-INSTALL_ROOT=`dirname "$0"`
-INSTALL_DEV="$1"
-STATEFUL_PARTITION=$(echo "$INSTALL_DEV" | tr 12 44)
-STATEFUL_PARTITION_DIR=/tmp/stateful_partition
-
-# set default label to chromeos-hd
-sed -i 's/^DEFAULT .*/DEFAULT chromeos-hd/' "$INSTALL_ROOT"/boot/extlinux.conf
-sed -i "{ s:HDROOT:$INSTALL_DEV: }" "$INSTALL_ROOT"/boot/extlinux.conf
-
-# fix fstab
-# keep in sync with src/platform/installer/chromeos_install.sh
-# TODO: Figure out if we can mount rootfs read-only
-cat <<ENDFSTAB | sudo dd of="$INSTALL_ROOT"/etc/fstab
-/dev/root / rootfs ro 0 0
-tmpfs /tmp tmpfs rw,nosuid,nodev 0 0
-$STATEFUL_PARTITION /mnt/stateful_partition ext3 rw 0 1
-/mnt/stateful_partition/home /home bind defaults,bind 0 0
-/mnt/stateful_partition/var /var bind defaults,bind 0 0
-ENDFSTAB
-
-mkdir -p "$INSTALL_ROOT"/mnt/stateful_partition
-chmod 0755 "$INSTALL_ROOT"/mnt
-chmod 0755 "$INSTALL_ROOT"/mnt/stateful_partition
-
-# Creates an empty resolv.conf file with the right permissions to avoid
-# it being clobbered by connman/dhclient.
-
-# We assume the stateful partition at /mnt/stateful_partition will still be
-# there when we boot into the new image
-mkdir -p /mnt/stateful_partition/etc
-
-# Default to Pacific timezone
-# If user already has a timezone set, this won't replace it
-ln -s /usr/share/zoneinfo/US/Pacific \
-    /mnt/stateful_partition/etc/localtime || true
-ln -sf /mnt/stateful_partition/etc/localtime \
-    "$INSTALL_ROOT"/etc/localtime
-EOF
-
-sudo chmod 0755 "$MOUNTPOINT/postinst"
-
-# done with mounting
-trap - INT TERM EXIT
-cleanup_mount
-
 # Fix up the file system label. We prefix with 'A'
 NEW_LABEL="A${ORIGINAL_LABEL}"
 sudo /sbin/tune2fs -L "$NEW_LABEL" "$UNCOMPRESSED_OUT_FILE"