Before we start, I just want to note that I will not be explaining fully on mesh creation and the tools within this tutorial. By now it is hoped that you are fairly acquanted with them. If you are not, I suggest reading the eggplant tutorial,and a couple others, and work on a few models of your own before attempting this. I will however highlight some of the more important ideas particularly within keyframing and animation where applicable and using some of the newer tools.

The first thing we need is 2 objects. A flag, and a flag pole.
The flag pole can be created with a simple tube to whatever size you want
Our flag is created by ...
Creating a box
Setting the X and Y divisions to 10.
Convert to Mesh
Veiw in left or right view, and delete the z component (the points in the back)
Convert to SubDivided
Veiw in top view and move the points until it looks like this

Slap a texuture on it and call it a flag.

Morph targets...
Next we need to create our morph targets.
1.Select the flag
2.Go to Build | Morph Targets | New...
3.Create a splashy name
Move the points ( in top View) to look like this

4.Then select Build | Morph Targets | None

We again see our original mesh
Repeat this proceedure from step 1 to step 4, 2 more times
the morphs should look like these images
     
Create one more morph and make the object flat

The last one is flat for a special purpose, and not used for the flag. I will be using this to demonstrate how to better understand morphs.

Scene Mode...
This part is somewhat more complicated then actually creating the morphs. Only because of the way they work. You could just slap a bunch of morphs together and get some pretty strange results, and often not get what you was looking for.It is my hope that this will be explain what happens and how you can prevent many problems.
First lets set up the flag's normal morphs without much explaination.

Extend the sequence editor to our flag.
Extend it further so that you can see the morphs
Select each morph and double click in the appropriate spots | add keys ( see picture )

And select the values of them to what I have below..
Morph1 0,1,0
Morph2 0,1,0
Morph3 0,1,0
leave our flat morph alone for now

You can choose to skip the values and do them all at once in the graph editor (Options | Graph editor) The results should look like this

( don't forget to click on frame 24 for the entire scene and change the animation to have only 25 frames)

Congradulations. You have a flag! hit Play to see the results!

We are not done... There needs to be some explanation of why it works. Examine the graph editor

First, I must note that in our example, we kind of used the object itself as a a start position and and end position.It kind of acts as a morph itself, saves us a little work.

Notice that where all the high peaks are on one morph, all other morphs are at 0 This keeps our morph looking correct and the way we expected it at each stage. If we had 2 peaks going on at the same time, the morph will add to each morph though not visible on the graph. It will also make you have to add/subtract to one of the morphs to fix the problem, and will give you weird results.

This actually happens already in our model, in between the keyed frames. Its just not noticeable because while one morphs value is going up, another value is going down.

We can exploit to see this in sample.
Add the keys as shown to the flat morph

flatMorph 1 0 0 0 1

This is practically the only way that it will work in this sample,that is, where the 2 peaks are at the ends.This is because there is no room anywhere else.The high peak is where no other morphs will add to it.

There are a couple exceptions, one is not totally exploitable because of the other morphs values are still at play. and that is by subtracting from the value of the other morph as in this image

The other is when you are morphing 2 different spots of a mesh instead of the same spot.