If upgrading the extension for ENS doesn't resolve it, then I would advise to open a ticket with McAfee. You don't have to upgrade the clients, as the extensions are backward compatible and will still manage lower versions of clients.
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OK, I was close to give up.
After updating the ENS extensions as suggested did not fix the problem, I was close open a support ticket or start a clean re-install.
But then I found the fix / workaround (whatever you will call it).
When adding a new exclusion, I have to add the path without the "Also exclude subfolders" option (as it is still greyed out) and click OK.
And then I select the previously created exclusion, click the edit button and - voila - it then it allows me to select the "Also exclude subfolders" checkbox.
Don't know what the logic is behind it, but at least it works now.
I would like say Thank You to all who supported me with their suggestions.
JUst wanted to pipe in and add this tidbit of info...
On wildcards when you add a '/' at the end of the exclusion that will enable subfolders to be checked. The reason for that is without that tyour only going to the current directory so say you wanted to exclude all sub directories in say C:/Program Files (x86)/McAfee to add the subdirectories using wildcards you could do C:/Program Files (x86)/McAfee/ and select all sub folders. Look at Kb54812.
Exclude a specific file in a folder named Temp anywhere on the system.