Not sure what technique was used in this instance but I have used photoshop displacement/bump maps and lighting effects in the past. There are numerous tutorials around. eg using
http://www.nomadthepirate.com/tutorial/
you can very quickly get:

etc. (not as good as the ones in this post I know) but you get the idea.
This mod's flags are using a much higher frequency bump map and lighting effect and an angle on the effect which is partly why the flags look so good cropped as they are...
BTW great tutorial - thanks!