In the SharePoint version 2.0 products, to exclude a directory from SharePoint “control”, you add an Explicit Exclusion to the Managed Paths for the site using the Central Administration Website. You also add Explicit Inclusions and Wildcard Inclusions at the same location.
However, in SharePoint version 3.0 products, it is a bit different. You still create Explicit Inclusions and Wildcard Inclusions on the administration page for the site. However, to create an Explicit Exclusion, you just have to create a new Virtual Directory in IIS underneath the appropriate IIS Virtual Server. This is because ASP.NET knows that when you create a new virtual directory, it should not touch it. Pretty nifty, eh?
When I set my excluded directories up, I did run into a minor issue. It was so minor that all I had to do was give the Network Service account read permissions on the physical directory.