Rogue Hit, don't wonrry. Flags confused me for a while too.
Flags are "flags" (if you don't mind me repeating the word in the same sentence) that trigger events such as when the player gets within 10 nm of an enemy ship, maybe a unit of [land based] SAMs or ships appear. So, flags are basically something that the mission builder outs in to activate events or units or make the mission have some randomness.
To create a mission which uses flags, you need three things: the player's flight, enemy, and a clear objective. So, before you go and just use a flag, ask yourself these questions: 'What will trigger the flag?' 'What will happen when the flag is triggered?' and most importantly, 'Why am I using a flag?'.
After you have asked yourself those three questions and have the three things for your mission, you can create your flag[s]. First off, you can either choose to activate a flag using an Event; or, you can set the flag using waypoints. If you use a waypoint for the player, the player will have to hit the waypoint DEAD ON or the flag won't activate, so activating the flag via waypoint, it is better for the AI.
Events are a little more complicated and lengthy to explain. You can learn more about them in the Mission Builder section of this site. You can either use Area Event, where the flag is activated when the player moves into the specified area. Time Event, where the flag is activated at a certain time, Goal State Change, where the flag is activated when a goal has been met, or Moving Area Event, where a flag is triggered when the player, friendly, or enemy enters the specified range for a moving object.
Well, I THINK I covered this topic ok... hoever, someone else will probably explain it a lot clearer (I'm thinking Recluse) than I have, and you can research it some in the Mission Builder section of the site. Hope I have helped you!