Distribute and its easy_install do work with PyPy, but the installation is not optimal.
The problem is easy_install treats PyPy 1.5 as CPython 2.7, so it installs the eggs built for CPython 2.7. They work, as they contain the .py files, but the .pyc files in the egg (generated by CPython) are useless for PyPy. Also, the installation won't gain from PyPy module pre-compilation (to PyPy-specific pyc files).
I think what easy_install should do under PyPy is to: * use the CPython 2.7 eggs if available * unzip them * recompile code to get PyPy pyc files