How to show country flag in Magento language or currency dropdown?

Edit your page.xml file ("app/design/frontend/default/YOURTHEME/layout/page.xml")
Around line 58 change

to

Note: You have to place your country flag images under "skin/frontend/default/YOURTHEME/images/flag/flag_FLAGNAME.jpg"..
Using firebug in mozilla find out the image name and place the image in apprpriate folder.

Thats it. You are done.