unzip those .png files into somewhere like "C:\Users\USERNAME\AppData\Local\Transmission Remote GUI\flags\" (Win8.1)
the "Transmission Remote GUI" dir should already be there if you've used it, while the "flags" dir does not exist if you've never managed to download flags.zip
if you're not sure about the path above, navigate your explorer to %appdata% and see where it goes
make sure the png path is something like ...\AppData\Local\Transmission Remote GUI\flags\jp.png
modify ...\AppData\Local\Transmission Remote GUI\transgui.ini, make ShowCountryFlag=1 in [PeersList] section
reopen exe, done
off-topic
if only theres a map plugin which shows the peer location on map...just like utorrent does
Flags.zip download fails with HTTP 404, because it tries to download from https://transmisson-remote-gui.googlecode.com/files/flags.zip, which doesn't exist anymore.