In the spline modeler, make the flag with a rectangle on the drawing plane. Make the extrusion very thin (short) or use the the plane primitive as the flag. Go back to the scene, select the flag and choose the wave deformer from the behavior options in the properties palette. Play with the settings until you have the wave you like in the appropriate plane. Try "Y" axis, Planar B. Wave height is 20 by default.