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So if I'm understanding this correctly, this builds the LFS kernel inside a docker container into an ISO image that can be used with VirtualBox, but cannot be used within a Docker container itself?

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Yes, that's correct. The goal was to use the whole LFS's system including OS kernel. Docker, AFAIK, uses host's kernel, see info here https://docs.docker.com/get-started/#virtual-machine-diagram

Anyway, it should be possible to build image for docker container if necessary.

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