Even with adaptive optics you still won't get close to the diffraction limit.

> Also, the increase in CCD densities have become enormous in the past few years. So it might be possible to make a matrix that could resolve the flag in the near future.

You can't work around the diffraction limit. There's no CCD that could compensate for the lack of the 5 km aperture required. You must have at least 2 (more like 3 or 4) pieces of glass separated by 5 km or more, otherwise nothing would work.