I'm not sure what's going on here, it looks like a distutils/distribute problem.
On my machine I have a file named "ReadMe.txt" (as you saw when creating a checkout of the repository), but when I run "python setup.py sdist" the generated source archive contains a file named "README.txt".
This is "feature" of distutils. When creating the source archive it looks for files named "README" and "README.txt" and adds them when they are found. Because I develop on OSX the file "ReadMe.txt" is detected and added to the source archive.
IMHO this is a bug in distutils, but I won't bother to report this issue because it is likely that the issue will be closed as "wontfix" because the distutils maintainers consider distutils closed for development.