After my wonderful experience with febootstrap and and gzipped kernel modules I just wanted to post a little information about it.
febootstrap uses insmod, it seems because insmod is required for building the initrd, while modprobe can read in gzipped kernel modules, insmod cannot. This means that there are two solutions to the problem, one would be to make febootstrap copy all of the modules to another location and gunzip them if they are zipped, then load the modules from the other location. Another solution would be to patch insmod to support gzipped kernel mods, and then the changes to febootstrap would be quite menial, and insmod would be more in line with current kernel capabilities.
For now I have solved the problem with this script for the Arch Linux package, and while this is VERY dirty, it gets libguestfs running now on Arch:
So I am wondering what everyone thinks the best approach would be here, so that I can start down a more viable path for getting this fixed.
Thanks
-Thomas S Hatch