See also: Flag (roleplay)
Every nation flies a flag, which can be selected in the Settings view of the standard Nation Page. A drop-down list provides access to virtually all current national (and many provincial) flags to choose from as the signature standard of your nation. Many nations use the Default flag which in RL is the Australian Aboriginal flag. Max Barry, the creator of NationStates, is an Aussie, which may explain this choice.
A longstanding complaint about the list of standard flags was its many exceptions, including: Azerbaijan, Djibouti, Ecuador, Equatorial Guinea, Faroe Islands, Fiji, Georgia, Haiti, Ireland, Ivory Coast, Kazakhstan, Latvia, Libya, Maldives, Montenegro, Nepal, Northern Marianas, Oman, Samoa, Scotland, Serbia, Tajikistan, Tonga, Tunisia, Turkmenistan, Tuvalu, Uzbekistan, Vatican City, and Yemen. As of December 2010, many of those flags have been added to the list. In 2011, in contrast to earlier practices, game admins made a point of quickly adding the new flags for Libya and South Sudan when the political situation in those countries forced a change. The flag of Malawi was similarly altered in 2012 after a new flag for that country proved unpopular in RL.
Another quirk in the standard flags list is the inclusion of certain sub-national flags. The banners of many RL political possessions (such as Aruba, Bermuda or American Samoa) are there, even though the flags of states and provinces (such as those of the United States or Canada) are not. However, the flags of England, Scotland and Wales are all included, as are the flags of the communities of Spain. It is speculated that this is so because Tiago Silva, the volunteer player who reformatted the flags in 2010, is Spanish in RL. For some inexplicable reason, the flag of the "nation" of Sealand also appears as a standard flag option.
Obviously, there are many more nations than standard flags. That nice fellow Max Barry resolved that by giving nations the chance to upload a flag of their very own. Custom flags formerly had to fit within the 6KB, 10KB or 12KB limits imposed on flag uploads, but as of March 2011, all custom flags up to 250KB are accepted, but are automatically resized if they exceed certain dimensions. 
A survey conducted by Ballotonia in May 2011 revealed that the Default flag is the most popular flag among NS nations, with the United States being a distant second, and the United Kingdom, Wales and Yap rounding out the top five. (It is speculated that the Welsh flag is so popular because it has the cool dragon on it, not because that many Welsh people play NationStates. Yap's popularity remains a mystery.) According to the survey, 35 percent of nations had an uploaded custom flag.
National flags appear on the forums as user avatars, with deleted nations being given a grayscale symbol resembling a generic flag branded with the word "EX-NATION." This symbol is replaced when a nation is resurrected.
Since September 2009, regions (via their founder or delegate) have been able to designate banners for themselves as well. Unlike national flags, it is not mandatory for a region to select a flag, nor is there a default flag for regions that do not choose a different design. There are no standard flags based on RL designs either, meaning all regional flags are custom uploads. They must not exceed a 30KB limit, and all are resized to fit a 150x100-pixel window. 
See gameplay for other graphics-related aspects of NationStates.