I used sprite flags for the first time in my game for LowRez Jam... I used them to denote the same type of object, even though their sprites were different and found it really useful (I ended up using all 8 flags!)
For example, you might have a game with different types (sprites) of aeroplane but set flag 0 for all of them so when you hit one with your missile you know you've hit a plane and not something else.