Hi jbardrof,
This is the by design behavior of website type project (The web application type project still has the “Exclude From Project” menu item). It’s because website project lack of the project file. The include/exclude information store in the web application project file (*.csproj) but website project doesn't have it.
To workaround this issue, we can set “Hidden” attribute for the file/folder which you want to exclude from project, and the refresh the project in Solution Explorer. For example:
1. Open Windows Explorer.
2. Local to the physical folder of your website.
3. Right click the file/folder which you want to exclude, and then select “Properties”.
4. Check the “Hidden” attribute.
5. Click the “Refresh” button in the Visual Studio 2005 Solution Explorer.