This is expected behavior.
Please understand that "Explorer" is a separate process, and the processes are well isolated. Even if you manage to stick its window into your form (this is possible in principle, but should be avoided by all means
), you won't be able to integrate it functionally anyway.
If you want to browse file system in your form, create such a browser, which will takes some hard work, but not conceptually very difficult. Or use one of the dialog classes shown here: http://msdn.microsoft.com/en-us/library/system.windows.forms.commondialog.aspx