Harley is correct. Old, worn or damaged flags are destroyed by burning. I have taken part in a number of flag retirements including one for a large fifty foot flag which required about 100 people to do it correctly.
The proper procedure is to cut the flag in the following manner. Cut the blue star field as one part. Cut each stripe as a seperate piece. For a large flag the stripes may be cut into smaller pieces. The pieces are gently placed in the fire, never thrown. The blue field goes in last as one single piece. BTW: as with all flags, be careful not to let it touch the ground even while being cut.
We have used flag retirement ceremonies as a closing ceremony at Boy Scout district and council events. If we have serveral flags to retire we will give the pieces out so people may place them in the fire as they leave. It is a quiet and thoughtful moment where more than one leaves with a tear in their eye.