I have just answered your support ticket on the subject, but for convenience I am pasting my answer here as well:
I am afraid to say that the only way to exclude a folder from the FileExplorer ViewPaths is to override the ResolveRootDirectoryAsTree() method by subclassing the existing FileSystemContentProvider.
For your conveninece I have isoated the project from the demo as much as possible, so you could see only the code needed for hiding folders.
I hope this was helpful for you.
the Telerik team
If you want to get updates on new releases, tips and tricks and sneak peeks at our product labs directly from the developers working on the RadControls for ASP.NET AJAX, subscribe to their blog feed