Thanks for the report and patch.  I think distutils was not written with Unicode in mind, or maybe even before Python had a unicode type.  Technically, http://docs.python.org/distutils/setupscript#additional-meta-data says that unicode is not allowed for metadata fields (nothing is said about py_modules, packages and the like), but we’ve fixed a couple of bugs related to unicode, so I think this is a reasonable request.  Can you post (part of) your failing setup script?