So I've troubleshot as much as I can to figure out exactly what is going on. I'm running Honeycomb 3.2 with the Tiamet 2.0 kernel. I ended up going line by line through the bootbt shell script and found that at line:

mount -o loop,noatime -t ext2 $kit/bt5.img $mnt
I'll receive:

ioctl LOOP_SET_FD failed: Device or resource busy
I've tried rebooting. I've reinstalled busybox multiple ways to no avail.
Is there something different with Honeycomb 2.6 as a result of the kernel?

Any ideas on what else to try?

Thanks for any advice.