Just recalling by head from STW mod experiences.
The number used in the BDF file dictates which built in flag will be used. If you want to assign a custom flag to an army do this:
Battle/BatInit/Historical Battles/BattleX
Make an ADF file for the army (you probably already have this one). Say it's called French2.adf
Make a TGA for the flag in the same directory and name it French2.TGA.
MTW also allows to add shieldcolors (this is a bif file). Call that one French2.bif.
To sumarize: store everything in the same directory, and use identical names. If you don't do that, the built in images will be used.
You may check Battle/BatInit/Historical Battles/Battle of Bannockburn to see an example for the Scottish.
It may be that MTW does not only check for identical names, but also legal imagedimensions (don't use a 100*100 pixels flag when a 50*30 one is expected).
Good luck and feel free to ask for more help if you need it.
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