List of Folders used by FM2007 is here
According to that the priority is:
<UL TYPE=SQUARE>
<LI> <User Data Folder> (My Documents folder)
<LI> <Shared User Data Folder> (Shared Documents Folder)
<LI> <Application Data Folder> (Folder you installed FM into)
</UL>
Items in the user data folder will be shown first, whilst items that come with the game will only be shown when no other content is present.
Bear in mind it is the config files and not the graphics that determine whether the content is present/shown. (So if you had a config with code for the England badge but no england logo then no logo will display, because the game will thing is displaying your england badge.)