Tunnels Set Up, But Not Working - Open SSH_4.3 / SSH 1.5 / Linux 2.6.15

Firstly, i must inform you that i have tried my current set-up on two
systems.

The first system is basically a standard linux install on a hard-drive.
Linux 2.6, OpenSSH 4.3.  On this medium, I am able to use publick key auth,
and do port forwarding/tunneling. No firewall is in the way. It works.
Easy. I am able to authenticate, create a tunnel, and encrypt my connections
to the irc server also running on this install.

The second system is a bit different; it contains all the same daemons,
kernel, and config files.  I am able to authenticate into the system, but
when i go to create a tunnel, i am given trouble.  I think the problem is to
do with the fact that the system is running off an ISO; there is 1 ramdisk
for the initrd, 1 ramdisk for the basic root system (this is mounted read
write, but permissions are set that only root can write here), and all other
programs/files are on a CD rom. (read only).  I CAN MAKE A TUNNEL, BUT NOT
CONNECT TO IT.

A view of tcpdump shows the client sending a PSH flag, and the server
responding with an ACK. thats it. nothing more.

I then started sshd -ddd on this system, and when i try connecting to the
tunnel, i am given this error:
debug1: channel 0: new [unknown (remote did not supply name)]

I dont think this is a config file error at all.

Someone please help me with this. Im stumped.  I dont seem to be missing any
libraries, and i cant determine with strace what files sshd are trying to
access when tunnel connection is attempted.

If you would like to try your short at the ISO yourself, please let me know.
Thanks.