When creating a Panel Page and selecting a layout, the page layout is not overidden I'm using Omega theme and have built 4 custom layouts for my sub-theme. If I activate layouts and select one in the admin my Omega sub-theme, everything is fine.

Now I want to use those layouts as the base for a Panel Page. When I do that, it injects the layout into the content section of the main (default) .tpl theme file.

My expectation is that it will completely replace that theme file the same way it does if I activate and use the layout in my sub-theme admin.

I've made sure to check disable Drupal blocks/regions when starting to build the layout.

I even tried using the stock layouts that come with Omega and no luck.

I can't think of anything else to try, especially since the layouts work outside of Panels.
Yes, that's how Panels is designed to work.  It can only take over the content rendered to the main content region.  If you want Panels to take over all regions then you need to use Panels Everywhere which is, incidentally, compatible with Omega 4.