genkernel needs a small fix for generating the zImage.initrd. With kernel 2.6.16 on the kernel-maintainers moved from the pathes ppc/ppc64 to powerpc. Attached is a fix for this problem. I tried with ${ARCH} instead of a hard-fixed 'powerpc', but when I build on the ppc64 here, it inserts this machine-type instead of powerpc and fails again. If you have a better fix, I would be happy.
Created attachment 92295 [details, diff] genkernel-pegasos.patch
3.4.0_pre4; thanks for the patch.