Does your project use the folder method or the group method? See Create project from an existing directory tree?
Yes I use folder method, and the folder I want ctag to skip does not show up in the project listing.
I guess, you use the folder method and the directory you don't want is a subdirectory. You can run Find In Files with options Project Files and Results to Edit Window selected with an empty search string to get a list of all project files as %fi in the Ctags option also produce.
I use variation of this method. I created .bat file which runs find on my folder structure and creates a list file and then runs ctag with that file as -L parameter. The reason I posted I was hopping I'm missing some option that will resolve the problem and I can just select "Update CTAG" from the menu and it would work
Alternatively you can remove from the Ctags options in the project settings dialog the -L %fi parameter (see in help of UltraEdit the page Ctags support) and specify your own include and exclude filters. I think (but never tested), if a file with a list of files is used, Ctags does not apply the exclude parameter on this list. It's also possible that you have not specified the exclude parameter correct.
Aha!

I did not think about this one, I will try and let you know, I think you right, --exclude does not play a role if you use %fi parameter. UltraEdit needs to create an input file first before invoking ctags, and thats where it blows up on my directory structure. I will try it and let you know if it worked.