I had to UNcheck "Only exclude from compressed file scanning" when making the exclusion, since the problem would still occur otherwise.
This is with NAV2004 on XP. Note that the Help for that section of NAV does say in 2000/XP "you cannot exclude items inside a compressed file," which I don't think is what's happening with that feature exactly, but it has to be off anyway.
I've heard of similar issues with the Opera browser, which compresses opera.exe and opera.dll, so I hope NAV2005 is a little better behaved.
This comes as a relief, since I thought the problem was with SP2.
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