I fixed it!
Upon digging through the forums I found CONFIG_SECURITY seems to break OpenVZ and I had the kernel (2.6.18-028test005) compiled with that option. But thanks anyway!

Vasily Tarasov wrote:
Hello,

can you, please, specify kernel version you're using and output of
`cat /proc/sys/kernel/cap-bound` command.

Thanks,
Vasily.


Stuart MacIntosh wrote:
Hello everyone
I'm trying to setup OpenVZ on a Slackware 10.2 HN
So far compiled and modified scripts to use the BSD init scripts (no
/etc/sysconfig) but I get this error:

# vzctl start 101
Starting VE ...
VE is mounted
Unable to set capability: Operation not permitted
Unable to set capability
VE start failed
VE is unmounted
#

Can anyone provide me with some insight into possible causes of this
error?
What is "vps.mount" and is it not included in the source code tarballs
for a reason?

Thanks
-Stuart

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Stuart MacIntosh
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