A confirmed bug - if the subfolder is excluded or hidden, it still shows up in the menu. If it's excluded, clicking the link to it produces a "file not found." If it's hidden, the images are still accessible.
At the top level, folder exclusion and hiding appear to work correctly.
Alas, the developer of the skin was an intern who is no longer with jAlbum, so bug fixes are unlikely, unless someone else wants to wade into the code and find the problem.