When trying to build distribute on the latest python-3.2rc I get the following traceback in the unittests (two others that are similar as well):

======================================================================
ERROR: test_develop (setuptools.tests.test_develop.TestDevelopTest)
----------------------------------------------------------------------
Traceback (most recent call last):
  File "/usr/lib/python3.2/distutils/util.py", line 283, in subst_vars
    return re.sub(r'\$([a-zA-Z_][a-zA-Z_0-9]*)', _subst, s)
  File "/usr/lib/python3.2/re.py", line 167, in sub
    return _compile(pattern, flags).sub(repl, string, count)
  File "/usr/lib/python3.2/distutils/util.py", line 280, in _subst
    return os.environ[var_name]
  File "/usr/lib/python3.2/os.py", line 450, in __getitem__
    value = self._data[self.encodekey(key)]
KeyError: b'abiflags'
During handling of the above exception, another exception occurred:
Traceback (most recent call last):
  File "build/src/setuptools/tests/test_develop.py", line 52, in test_develop
    cmd.ensure_finalized()
  File "/usr/lib/python3.2/distutils/cmd.py", line 109, in ensure_finalized
    self.finalize_options()
  File "build/src/setuptools/command/develop.py", line 51, in finalize_options
    easy_install.finalize_options(self)
  File "build/src/setuptools/command/easy_install.py", line 225, in finalize_options
    self.expand_dirs()
  File "build/src/setuptools/command/easy_install.py", line 335, in expand_dirs
    'install_scripts', 'install_data',])
  File "build/src/setuptools/command/easy_install.py", line 323, in _expand_attrs
    val = subst_vars(val, self.config_vars)
  File "/usr/lib/python3.2/distutils/util.py", line 285, in subst_vars
    raise ValueError("invalid variable '$%s'" % var)
ValueError: invalid variable '$b'abiflags''

It seems that something in the addition of abiflags is causing distutils to search for abiflags in os.environ.  After talking with tarek on IRC we decided to open a bug here to see whether this is desirable change in behaviour within the stdlib.

The revision introducing abiflags is here: http://svn.python.org/view?view=rev&revision=85697

Actually, looks like distribute should be updated to include "abiflags" in self.config_vars in setuptools/command/easy_install.py. There seems to be a whole bunch of code pasted directly from distutils and it isn't up-to-date anymore. Compare:
https://bitbucket.org/tarek/distribute/src/4ab9b96dc540/setuptools/command/easy_install.py#cl-195
with:
http://code.python.org/hg/branches/py3k/file/9b1daa80168d/Lib/distutils/command/install.py#l321

This bug probably needs to be reported to the distribute issue tracker instead. Tarek, Éric, can you proceed?

Ha!  Your reply jogged my memory.  MvL mentioned exactly the potential for this backwards incompatibility here: http://mail.python.org/pipermail/python-dev/2010-December/106351.html when talking about whether other API changes could go into distutils to support accepted PEPs.

tarek, eric, since python-3.2 is now out, I assume that you're going to want to port distribute rather than back the changes out of distutils.  Do you want a bug report or is this high enough priority that you're already working on it?

Toshio: yeah go ahead and add one, and let's do this asap in Distribute

Also, let's keep this open/valid for Distutils2

Distribute issue opened and patch based on Antoine's comments attached.

https://bitbucket.org/tarek/distribute/issue/191/distribute-fails-unittests-on-python-32

Now fixed in packaging too.