I discovered this the other day when PyPI was down and I wanted to tell a user to use our own package index.
If I run
easy_install -i http://my/index foo, the 'foo' package will be downloaded from my index, and easy_install will run
setup.py bdist_egg on it. However, the 'foo' package has requirements listed in setup_requires, and since none of the options from easy_install are passed down, it will still go to PyPI to try to get the setup_requires dists.
This is a slightly tricky issue, but I think I have a solution, albeit a slightly hackish one. Code forthcoming if it turns out to work.