I didn't know what it was for sure, but remember seeing something similar in old movies, so I looked it up to verify what I thought the blue star flag meant.
It's flown over the capitol building every Veterans day, and displayed in home front windows, and each blue star represents that a son or daughter is serving the country in the US military.
It was made during World War 1, and used a lot during WW2, but Korea and Vietnam weren't felt to be patriotic wars, and nothing military was quite as popular to associate with when the US went to war in foreign countries we hadn't been attacked by, so the flag became historic through disuse. Things change and public perception to the military reverted to patriotic after New York City was targetted on Sept 11th, 2001.
For history and more info on the blue star flag: http://www.homeofheroes.com/hallofheroes/1st_floor/flag/1bfb_disp9b.html