This information applies to 1.29, 128F and 1.28e.
If the EAW folder contains a "dir.set" file with the folder paths then when the exe looks for files any in the root folder will have first priority and files in the theatre folder have second priority.
If a planeset has been selected then files in the planeset folder have third priority.
At this point the exe will look for a "PDir.set" and a "FMDir.set" file in the planeset folder. If they are present then the exe will read them to get the paths to the skin and FM data files.
This is the "smart" system because these files reference "planes" folders which are effectively libraries of folders which can be selected. Multiple copies are not needed.
However, the "crude" system can be very useful without the need to make "PDir.set" and "FMDir.set" files.
Yesterday, as a response to a question from Moggy I re-assembled the 1.28c theatre for China with two plansets.
Planset1 has all the original China aircraft files, and aircraft selection screens etc:
Planset2 has Ade Kelly's Flying Tigers aircraft and selection screens:
The "crude" method also works in 1.28c, and using it yesterday saved me from having to split the 30 aircraft in each planeset into folders, make a "Planes" folder and the "PDir.set" and "FMDir.set" files.
It worked well with the 1.29 640x480 screen version of the eaw.exe.
Planeset1:
Planeset2: