The flag was connected to the wheels such that which ever way the cart was turned the flag stayed in the same orientation. (i.e. if you push the car back and forwards the flag didn't move but if you turned the car around the flag moved with respect to the car but not with respect to the floor).

I know this must be a fairly simple gear setup but I can't think of how it would work without have crunching gears.

Any ideas?

I can't quite picture it in my head, but it's something like a differential:

http://en.wikipedia.org/wiki/Differenti ... _device%29

I'm not entirely sure what you mean.

Do you mean the orientation of the flag stayed the same, regardless of the direction of the car?
Or simply that as the steering axle turned, the flagpole turned to oppose it?

Yeah, I thought it would be based around that but the differential is kind of different in that it does the opposite of what you want.

i.e. when both wheels are moving the same speed in the same direction the diff spins but if they are moving in the opposite direction at the same speed they don't spin.

This would give the overall effect the the flag would spin around all the time rather than staying still all the time.

The effect that I saw on this toy was more like a compass pointer. i.e. whichever way the car went the flag pointed in the same compass direction (but using gears, not magnets).