Bhutan is a Buddhist state where power is shared by the king and government. The country's name in the local dialect means Land of the Dragon. In Bhutan, thunder is believed to be the voices of dragons roaring. In about 1200, a monastery was set up called the Druk (Thunder Dragon) with a sect called the Drukpas, named after it. The name and the emblem of the dragon have been associated with Bhutan ever since. The dragon on the flag is white to symbolize purity.
The two colors of the flag, divided diagonally, represent spiritual and temporal power within Bhutan. The orange part of the flag represents the Drukpas monasteries and Buddhist religious practice, while the saffron yellow field denotes the secular authority of the dynasty.
Regarding the dragon, it represents Druk, the Tibetan name for the kingdom of Bhutan. The jewels clamped in the dragon's claws symbolize wealth. The snarling mouth represents the strength of the male and female deities protecting the country. Source: Ultimate Pocket Flags of the World, DK Publishing Inc., 1997