If you are reading in binary mode, then all readline does is get you the next \n terminated chunk of data, which is a convenience in some circumstances.  You have to do all the newline handling yourself.  Otherwise it isn't a binary read.

I think the "right way" to do what you want is to write a custom subclass of one of the IO classes.  Should such a subclass be added to Python?  That's an interesting question.  A first step toward an answer might be to post it as a recipe on the ActiveState site and see how many people find it useful.