We briefly discussed this on the distutils-sig thread. I know this is a hack -- 
but the alternatives are especially sucky for us.

Building a customized Jython exe for the many platforms out there would be a big 
pain. We don't even have the time and resources for making a custom Windows exe 
for the 2.5 release (my guess is we won't get it until at least 2.5.1 =[ )

Otherwise the thought of our installer detecting a compiler and compiling one on 
the spot makes me want to cry. Requiring a C compiler for such an integral usage 
of Jython kills one of our platform's main features: easily ran anywhere, all 
you need is a JRE.

What if I made the patch emit a big warning and not apply the hack if extra 
arguments are detected? That way the majority of scripts work and those that are 
incompatible with the hack at least fail in a less mysterious fashion. This 
would be a huge improvement over the current situation and a big win for the 
Jython 2.5 release.

Plus the patch is future proof; if we start providing native sys.executable's in 
the future, setuptools would adapt since it looks for the shebang line magic.

Please consider compromising on correctness here. The work required to do this 
right for every platform is such a multitude more than this fix