I know it is bad form to reply to your own posts but I have modifed this process slightly so that distutils can install new modules. This works with the READ ONLY image for modules that are pure python. If you what to install a module with bits of C in them you will need one of the dev images install but it should work.
Fist you need to add a couple of directories in your home directory if you don't already have them.
CODE
mkdir ~/bin
mkdir ~/lib
mkdir ~/lib/python
mkdir ~/share
Now add a line in your .profile file
CODE
PYTHONPATH=$HOME/lib/python
export PYTHONPATH
and optionally alter the PATH line
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PATH={what ever is here}:$HOME/bin
Lastly create a file in your home directory called .pydistutils.cfg containing
CODE
[install]
home=$HOME
For good luck restart.
Now if you try to install something packaged with distutils you can use something like
CODE
python setup.py install
and the modules will be placed in the the ~/lib/python directory which is now sourced in your python code. In theory you can install newer/older versions of the modules in the read-only image and the freshly installed versions will override the built in versions (I have not tried this).
If anyone tries this let me know. I have installed a couple of packages with distutils and it seems to work ok as does writing modules and saving them into ~/lib/python