You should read this page:
http://docs.splunk.com/Documentation/Splunk/5.0.2/admin/Wheretofindtheconfigurationfiles
Basically the former is the system default directory, which is the sort of base layer of the whole config system, and which can be overridden by several higher-precedence layer.
and the latter is the "local" directory of the search app's configuration layer. Which can be overridden by user-level config, but which itself overrides the search app's "default" config as well as all the "system" config, at least when you're in the search app.
but again, the real answers are all on this page: http://docs.splunk.com/Documentation/Splunk/5.0.2/admin/Wheretofindtheconfigurationfiles
