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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.