Little Hawk, it is NOT illegal to fly foreign flags in the US. The people who told you that are idiots. Now, there are rules of etiquette pertaining to the US flag, for instance, that if you fly the US flag along with any flag, the other flag isn't supposed to be higher, etc. But anyway, as I understand, those rules were invented and promoted by organizations like the American Legion and do not have the force of law.It USED TO BE illegal to burn the US flag publicly, but the Supreme Court wisely overturned that law in, I think, 1993. (I remember I was in England when I got the news.)
On many occasions I have seen people display other flags right here in St. Paul. For example, an Irish pub I know displays the Irish flag, and a pub with a British theme flies a British flag. I've never heard of anyone objecting. I've seen private homes fly various flags, too.
At Holden Village, Washington, a Lutheran retreat center, every building flies the flag of a different country. I don't think any of them is American. It's helpful for visitors to identify which building is which, because many of them otherwise look alike. I'm sure they wouldn't do it if it were illegal or if many people were offended by it.
In fact, I think any law against flying a foreign flag would probably be unconstitutional. If you have a constitutional right to burn the American flag, I can't see why you wouldn't equally well have the constitutional right to display a foreign one. Even aliens living in the US have rights under the constitution.
Come to think of it, during the Elian Gonzalez affair, I remember seeing Cuban-Americans flying HUNDREDS of Cuban flags.