This is the Brown's "Bloody Arm" flag of the Spanish- American War. The Said to have been designed by Capt. William S. Brown, this flag is different than Capt. Dimmitt's bloody-arm flag, although both have a similar symbol.
Tradition tells us that this banner was flown at the Battle of Bexar and again at Goliad (Brown was a signer of the Goliad Declaration of Independence). Later Brown also to San Felipe where the banner was again said to be flown (San Felipe was the site of the first naval battle between the Texans and Mexico). It als appears to have been flown in front of the American Hotel in Velasco on January 8, 1836, along with the Troutman flag of the Georgia Battalion. The US flag in the back shows how the Texans are trying to back away from an oppressive government like the American colonists did. The bloody arm was a common symbol of Texan strength back then.
The flag had thirteen alternating red & white horizontal stripes and a blue section as you see here. "Independence" was written on one white stripe and a sinewy arm and hand grasped a bloody sword in the oversized (long) blue union. We have one source that states the flag was flown at the Convention when Independence was declared on March 2nd, along with the Dodson flag. In John Henry Brown's "History of Texas" we find the following: "Over the cabin in which the convention met and declared for independence, floated a flag with the design of a sinewy hand grasping a red sword, and underneath this was a lone star flag."