System shouldn't be busy in recovery mode... also, it shouldn't be mounted if you're trying to write a fs image
And... no, if your phone can't boot, it can't boot. That includes starting adbd.
If you can enter recovery/spl, it's booting just fine.
Have you checked the sdcard from the shell in android, or from your computer?
If it's the latter, you should make sure you can access the file from android.
I would recommend that you copy the flash_image binary out of /system (and /data), because you're rewriting that partition
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