The displacement effect is defined by a material mapping object, which is given as a sub object for the displacer.
To create a waving flag:
1. Create a nurbs mesh consisting of 10 x 6 control points and representing a flag.
2. In the material selection tab, select the desired material and create a parallel mapping object.
3. Multi select the nurbs mesh and the material mapping object, and click the displacer tool.
4. In the property window, set the 'Space' option to 'UVW'.
5. Create a key frame animation where the parallel mapping object moves over the mesh.