using following method i created ext2 based initrd img rather than cpio based:
# Ramdisk Constants
# Create an empty ramdisk image
dd if=/dev/zero of=/tmp/ramdisk.img bs=$BLKSIZE count=$RDSIZE
# Make it an ext2 mountable file system
/sbin/mke2fs -F -m 0 -b $BLKSIZE /tmp/ramdisk.img $RDSIZE

# Mount it so that we can populate
mount /tmp/ramdisk.img /mnt/initrd -t ext2 -o loop=/dev/loop0
#populate from default-initrd contents

# Finish up...
umount /mnt/initrd

When i use kickstart & tftp server to init the machine, kernel is going panic with following error.

"Unpacking intramfs ...<0>kernel panic -not syncing :no cpio magic"

When i populate a directory with default-initrd img contents and creates a cpio based initrd.img, machine boots up properly.

command to create cpio: (i used)
#cd <working dir>
#find . | cpio --create --format='newc' > ~/tmp/newinitrd

If i do same process for SLES10, it works in both ways.

Any idea if SLES11 kernel(default-kernel) dropped supporting ext2 based generated initrd images..??