My advice: Don't rely on flattening an image to get transparency. It's better to actually make a separate layer to use as a mask for creating an alpha channel. That way you'll have all the layers you need if you want to edit your flag for any reason, plus you can use the same anti-aliasing techniques in setting up the transparency as on the rest of the flag.
For an example, check out the templates posted on my personal Web site (see my signature).
