I think it would help to add a code comment near here explaining why virtualenv.py includes base-64 encoded Python scripts, and where the sources for the scripts come from (e.g. are the human-readable versions stored or copied from elsewhere or are these the sources).
I came across this issue while troubleshooting issue #281. The decoded version of DISTRIBUTE_SETUP_PY was being passed as the command-line argument to a subprocess call that wasn't behaving as expected. The script being base-64 encoded makes the issue harder to debug and troubleshoot (and in particular, modify).
I see now that the original sources are in the directory named virtualenv_embedded, though this can be mentioned.
I think the code comment should also include instructions on how to update the base-64 encoded strings in virtualenv.py from the source files located in the virtualenv_embedded directory. In particular, does the source tree have a helper script to do this for you automatically, or is this a manual step?