Yes, that is well-known.
Unix root filesystem cannot be readonly in its entirety. Linux is much
better, but even Linux is not perfect.
So, what I do is --- I prepare the /var, /home, /etc, /dev in a tar.gz
file and place it on CD. Then, from rc.sysinit I mount tmpfs on those
points and unpack the tar.gz from / --- thus ending up with readwrite /var
/home /etc and /dev. (you could avoid /dev issue by using devfs but then
you will have other little problems to deal with :)
Btw, you will encounter lots of other problems, of course. Making a Linux
distribution is fun (I enjoy it) but it is not as trivial as some think.
It is certainly not a "pile of rpms" and Red Hat certainly do _not_ "just
package some free software" and sell it. Even without going into the level
of producing _general purpose_ distribution (which is what Red Hat Linux
is), making a (even specialized) Linux distribution is non-trivial. But it
is fun, try it :)
Regards
Tigran
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