The way to detect weird directories that should be excluded from the user interface is to check for the FILE_ATTRIBUTE_HIDDEN and FILE_ATTRIBUTE_SYSTEM attributes being set simultaneously. This is the mechanism used when you uncheck Hide protected operating system files in the Folder Options dialog. (Programmatically, you detect whether the user wants to see protected operating system files by checking the fShow­Super­Hidden member of the SHELL­STATE structure.) Michael Dunn suggested using Path­Is­System­Folder to detect these special directories, but that is not quite right. Path­Is­System­Folder is for marking a directory as “This directory has a nondefault UI behavior attached to it. Please consult the desktop.ini file for more information.” You do this when your directory is, say, the root of a namespace extension, or it has been subjected to folder customization. Windows uses it to indicate that the directory has a localized name, as well as other funky internal state. There are two ways to mark a folder as having nondefault UI. One is to set the FILE_ATTRIBUTE_READ­ONLY attribute, and the other is to set the FILE_ATTRIBUTE_SYSTEM attribute. Either one works, and Path­Is­System­Folder checks for both, returning a nonzero value if either attribute is set. In its default configuration, Windows uses the read-only flag to mark folders with nondefault UI. However, some applications mistakenly believe that if a directory is marked read-only, then files within the directory cannot be modified. As a result, these applications refuse to let you save your documents onto the desktop, for example. To work around this, you can use the Use­System­For­System­Folders to tell Windows to use the FILE_ATTRIBUTE_SYSTEM attribute instead. Of course, if you do that, you will run into problems with applications which mistakenly believe that if a directory is marked system, then the directory is inaccessible. So you get to pick your poison. Programmers who wish to mark a folder as having nondefault UI should use the Path­Make­System­Folder function to set the appropriate attribute. That function consults the system policy and sets the attribute that the policy indicates should be used to mark folders with nondefault UI.

Going back to the original question, then: The difference between Path­Is­System­Folder and checking for folders that are marked hidden+system is that they check different things and have different purposes.