You're on the right track, but they python setup procedure is screwing you up; it doesn't work well with GAE.
When you deploy an app on GAE, it'll upload your entire project folder to the GAE servers. All your libraries must be inside your project folder, or else they'll be missing when running on the GAE servers.
When you install a python library though, it's usually in an installable package with the actual library plus some installer code, test code, etc. The actual library code usually is in a subfolder of what's actually unzipped. Running the setup copies the library into your global python library, which is useless for GAE.
So what you need to do is copy the actual gflags library itself into your GAE project folder. I took a quick look, and I'm guessing all your really need is to copy gflags.py and gflags_validators.py from the egg into your GAE project folder. The rest appears unnecessary.