I'm sure you could compile a native X server, and move a lot of functionality out of the image and onto the native environment. I just really didn't feel like cross-compiling everything xD Its a lot easier and faster to run apt-get.
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With a custom kernel and filesystem in an image, why you could do ANYTHING!?
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I don't think its possible to load a new kernel from inside the image, but maybe I'm just not enough of a hack