The flag doesn't stand for anything directly offensive, and really shouldn't be that big of a deal. People do use that flag as a beacon of white power, though, and however ignorant, that is what most people see. It's stupid, yes, but that's what it's seen as.
Really funny, the design was used by a few rappers here in California on their album cover. They changed the colors to black, green, and yellow. Looked awesome.