
Ugly, but legal.
World Net Daily has posted on this story about these flags being sold on eBay, pondering the possible legal action for defacing the flag, but it is fruitless.
First off, the U.S. Flag Code is one of the few federal laws that really is a suggestion. There is no penalty for violations of the code, save for a few state or local ordinances, which usually include fines.
Here's the deal: if the people making these flags are manufacturing them themselves, instead of buying the flags and silk-screening Herr Obama's face on the canton, then there is no violation; if it don't have fifty stars, it ain't a U.S. flag, and is thus exempt from the restrictions of the code.
It's a whole other story if they are truly defacing U.S. flags, but like I said, the penalties would be subject to the local law enforcement's discretion.
The dimensions of the flag are also important. The flag pictured, I would hazard to guess, is about 3:5 and the U.S. flag is defined as being 10:19; that, too, is important.
What would it mean if one flew that flag upside-down, I wonder...