Take this with a pinch of salt, because I haven't played FM2007 - mainly due to my own frustration with the lack of clarity of what the settings do in FM2006.
That said, I spent loads of time playing FM2006, and I'd say I knew what most of the sliders did and how to use them. But it took a lot of playtesting. The FM2006 manual descriptions were absolutely rubbish.
In FM2006:
Tempo: How quickly players look to do something with the ball. On a high tempo, they'll try to get the ball moving quickly, either by passing or running with the ball. On a slower tempo, they take their time controlling the ball and looking at their options before making a decision.
In Practice: A high tempo is good with technical sides that can control the ball quickly. It makes sense against teams playing a high closing down, as otherwise you'll be subject to too much pressure while dallying on the ball.
A slow tempo is better for poorer players in the sense that it gives them time to control the ball and look for options. That said, really poor players often play a rubbish pass anyway, meaning it's often just as effective to hoof the ball down the field as quickly as possible. It also works against teams that are sitting back (not closing down), as your players again have time to wait until they can actually do something "intelligent"

Note that even at a quick tempo, your player might well elect to play a sideways or backwards pass, so that tempo does not necessarily directly influence how quickly you hoof the ball forward. But it can, with the right settings. Mentality and passing style play quite an important role here.
Passing: Direct is move the ball upfield as quickly as possible. In essence, this translates to players looking for a good passing option further up the field (than they are). Of course, if all your forwards are marked, the direct ball might only be played to midfield from defence. And if no one is available in midfield either, you might see the ball played around in defence first. But in general, the more you move the passing slider to the right, the more your players play kick and rush. The further to the left the slider is, the shorter players pass. Of course this all assumes a possible recipient of the pass etc. etc. etc. It's a general guide as to how players should play, not set in stone.
So, a high tempo direct passing game will see you play far more long balls out of defence to get the ball upfield; and the pass will be played as soon as a player has received the ball. But if you play with a slower tempo, players will still kick the ball upfield; they'll just take their time before playing the pass. At extreme tempo settings, you might see a lack of direct passing because you're giving the opposition time to mark your forwards, and thus there's no passing option. So you can't just set up each slider in isolation - you need to take a holistic approach to designing your team's tactic.
Conversely, if you play a short passing game at a high tempo, you'll see the ball ricocheting about between players, as the ping the ball around in small localised groups. If you play at a slow tempo, they tend to hold on to the ball for a second or so before playing a short pass.
Now, if you take that into account, it does mean one other thing:
On a high tempo setting, the ball will be moved forward quicker (assuming your settings aren't completely daft). This
isn't because high tempo = kick the ball up the pitch though.
It's simply the result of the fact that your players aren't holding onto the ball for very long, and so the ball moves around much quicker than on a slower tempo. Seeing as you are ultimately trying to get the ball forwards, the ball gets moved forward faster. But it also moves sideways (or even backwards!) faster too.
To see the tempo differences most clearly, try setting your tempo to extreme settings, and reducing the overall match speed. If you play on the highest 2 speed settings, you can hardly tell that your players are taking their time with the ball.
Furthermore, play for a while on full highlights; you only see a small portion of the game otherwise. Whilst the intermittent periods are relatively dull regarding chances etc., it'll give you a much better idea of what your players are doing over the course of an entire game.
Anyway, as I haven't got FM2007, don't take the above as gospel. But I doubt they changed that much (they didn't with most settings from FM2005 -> FM2006 , at any rate).