Fools! An elf is the most dwarvenly image for a flag of all!
It can mean one of two things, in the tradition of King Urist the Great, who slaughtered no less then 50 elves with his bare hands after his axe broke. If it is a bloody elf, it implies the dwarves kill many, many elves. Of course, you likely did not look too carefully at the flag, so you missed the fact that the elf in question had been strangled with his own entrails.
On the other hand, an elf is undoubtedly a fearesome beast. I say beast for, though we all know the hippies are intelligent, they do not live under the ground or forge things of metal, and so are not truely civilized. No, they are beasts, and they are among the most bloodthirsty, fearesome beasts imaginable. When a dwarf puts a dragon on his flag, he is saying to his enemies that his wrath will be akin to that of a dragon. When he puts a goblin or a snake on it, it means to watch your lower tunnels, for he is crafty and cunning, and will come like a thief in the night where you least expect it. But when he puts an elf on his flag...it means he has many dwarven friends. And they will come for you without reason, and they will not stop coming until they are -all dead-. Yes, tread carefully around the dwarf who puts an elf on his flag, for he is easily offended, and a master of war.