diff --git a/src/pylorax/__init__.py b/src/pylorax/__init__.py
index fbeae25d..ca40b4c3 100644
--- a/src/pylorax/__init__.py
+++ b/src/pylorax/__init__.py
@@ -177,10 +177,17 @@ class Lorax(BaseLoraxClass):
         logger.debug("set efiarch = {0.efiarch}".format(self))
         logger.debug("set libdir = {0.libdir}".format(self))
 
+        # set up work directory
+        logger.info("setting up work directory")
+        self.workdir = workdir or tempfile.mkdtemp(prefix="pylorax.work.")
+        if not os.path.isdir(self.workdir):
+            os.makedirs(self.workdir)
+        logger.debug("using work directory {0.workdir}".format(self))
+
         # set up install tree
         logger.info("setting up install tree")
         self.installtree = LoraxInstallTree(self.yum, self.basearch,
-                                            self.libdir)
+                                            self.libdir, self.workdir)
 
         # set up required build parameters
         logger.info("setting up build parameters")
@@ -199,13 +206,6 @@ class Lorax(BaseLoraxClass):
         logger.debug("set bugurl = {0.bugurl}".format(self))
         logger.debug("set is_beta = {0.is_beta}".format(self))
 
-        # set up work directory
-        logger.info("setting up work directory")
-        self.workdir = workdir or tempfile.mkdtemp(prefix="pylorax.work.")
-        if not os.path.isdir(self.workdir):
-            os.makedirs(self.workdir)
-        logger.debug("using work directory {0.workdir}".format(self))
-
         # parse the template
         logger.info("parsing the template")
         tfile = joinpaths(self.conf.get("lorax", "sharedir"),
@@ -381,29 +381,43 @@ class Lorax(BaseLoraxClass):
         logger.info("cleaning up python files")
         self.installtree.cleanup_python_files()
 
-        # compress install tree
-        initrd = DataHolder(fname="initrd.img",
-                            fpath=joinpaths(self.workdir, "initrd.img"))
+        # compress install tree (create initrd)
+        initrds = []
+        for kernel in self.outputtree.kernels:
+            suffix = ""
+            if kernel.ktype == constants.K_PAE:
+                suffix = "-PAE"
+            elif kernel.ktype == constants.K_XEN:
+                suffix = "-XEN"
 
-        logger.info("compressing install tree")
-        success, elapsed = self.installtree.compress(initrd)
-        if not success:
-            logger.error("error while compressing install tree")
-        else:
-            logger.info("took {0:.2f} seconds".format(elapsed))
+            fname = "initrd{0}.img".format(suffix)
 
-        # copy initrd to pxebootdir
-        shutil.copy2(initrd.fpath, self.outputtree.pxebootdir)
+            initrd = DataHolder(fname=fname,
+                                fpath=joinpaths(self.workdir, fname),
+                                itype=kernel.ktype)
+
+            logger.info("compressing install tree ({0})".format(kernel.version))
+            success, elapsed = self.installtree.compress(initrd, kernel)
+            if not success:
+                logger.error("error while compressing install tree")
+            else:
+                logger.info("took {0:.2f} seconds".format(elapsed))
+
+            # copy initrd to pxebootdir
+            shutil.copy2(initrd.fpath, self.outputtree.pxebootdir)
+
+            initrds.append(initrd)
 
         # create initrd hard link in isolinuxdir
-        source = joinpaths(self.outputtree.pxebootdir, initrd.fname)
-        link_name = joinpaths(self.outputtree.isolinuxdir, initrd.fname)
+        source = joinpaths(self.outputtree.pxebootdir, initrds[0].fname)
+        link_name = joinpaths(self.outputtree.isolinuxdir, initrds[0].fname)
         os.link(source, link_name)
 
         # create efi images
         efiboot = None
         if grubefi:
             kernel = self.outputtree.kernels[0]
+            initrd = initrds[0]
 
             # create efiboot image with kernel
             logger.info("creating efiboot image with kernel")
diff --git a/src/pylorax/installtree.py b/src/pylorax/installtree.py
index 18e1f3d0..f25ed859 100644
--- a/src/pylorax/installtree.py
+++ b/src/pylorax/installtree.py
@@ -39,12 +39,13 @@ from sysutils import *
 
 class LoraxInstallTree(BaseLoraxClass):
 
-    def __init__(self, yum, basearch, libdir):
+    def __init__(self, yum, basearch, libdir, workdir):
         BaseLoraxClass.__init__(self)
         self.yum = yum
         self.root = self.yum.installroot
         self.basearch = basearch
         self.libdir = libdir
+        self.workdir = workdir
 
         self.lcmds = constants.LoraxRequiredCommands()
 
@@ -338,6 +339,9 @@ class LoraxInstallTree(BaseLoraxClass):
         for fname in ["build", "source"]:
             os.unlink(joinpaths(moddir, fname))
 
+        # move modules out of the tree
+        shutil.move(moddir, self.workdir)
+
     def create_gconf(self):
         gconfdir = joinpaths(self.root, ".gconf/desktop")
         os.makedirs(gconfdir)
@@ -498,11 +502,14 @@ class LoraxInstallTree(BaseLoraxClass):
         dst = joinpaths(self.root, "sbin")
         shutil.copy2(src, dst)
 
-    def compress(self, initrd):
+    def compress(self, initrd, kernel):
         chdir = lambda: os.chdir(self.root)
-
         start = time.time()
 
+        # move corresponding modules to the tree
+        shutil.move(joinpaths(self.workdir, kernel.version),
+                    joinpaths(self.root, "modules"))
+
         find = subprocess.Popen([self.lcmds.FIND, "."], stdout=subprocess.PIPE,
                                 preexec_fn=chdir)
 
@@ -514,6 +521,10 @@ class LoraxInstallTree(BaseLoraxClass):
         gzipped.write(cpio.stdout.read())
         gzipped.close()
 
+        # move modules out of the tree again
+        shutil.move(joinpaths(self.root, "modules", kernel.version),
+                    self.workdir)
+
         elapsed = time.time() - start
 
         return True, elapsed