OK, try this on the tablet:

Go into red pill mode in app manager:
Application Manager->Tools->Application Catalogue->New
Type 'matrix' (no quotes into the web address field then hit cancel, then choose red pill
Then browse installable applications - you should see libreadline5 there.

You might also want to install rootsh and openssh if you haven't already.

In scratchbox log in to the arm target and do
nano /etc/apt/sources.list

Add these two lines
deb http://repository.maemo.org/extras/ diablo free non free
deb http://repository.maemo.org/extras-devel/ diablo free non free

and save the file. Back at the ARMEL prompt do 'apt-get update' to refresh the repo list.

Then do:
apt-get install libreadline5 libreadline5-dev

Hopefully should work. Then assuming you have the source extracted inside your scratchbox home directory you should be able to cd to ~/squeezeplay/src and run make from there, then see what happens.