Updated info for those reading in 2016:
--allow-external
and
--allow-unverified
were recently deprecated. Installing packages external to PyPi using pip is no longer supported: http://www.python.org/dev/peps/pep-0470/
As an alternative, when you really need to install that external package, you can download the source code and run its setup.py. For example, for PIL 1.1.7, download from http://www.pythonware.com/products/pil/, then:
$ tar xvfz Imaging-1.1.7.tar.gz
$ cd Imaging-1.1.7
$ python setup.py install
(^ from the PIL README)
If you only want to install the package to a specific virtualenv, you can just activate your virtualenv first. ** thanks @Caumons
Alternatively, substitute the path to your virtualenv for 'python' in the third line, e.g.:
$ /home/username/virtualenv-name/bin/python setup.py install