I have exactly the same problem, its a really serious bug making the program almost useless. I have been using 3D Flag a lot of years at work and its to bad that its so unstable, even more than before.
I have tried using the After Effects camera, of course using a solid with the right size, pre-comping the texture and more…
The only thing you can do its by chance getting it right and then dont touch a thing… maybe you are lucky that the project is stable and that the full flag can be rendered correctly.
Sometime it works to set some value like “gravity” to 0 then set it to the correct value again, just to recalculate the simulation, maybe its the same as using the “simulation on” check-box.
Please try to fix this problem, its not really ok when you have bought this product but hardly can use it.
using Win 7
3D Flag 2.0
PAL 25f/s