Like Andrew said /exclude parameter of xcopy should be existing file that has list of excludes.
Documentation of xcopy says:
Using /exclude
List each string in a separate line in each file. If any of the listed strings match any part of the absolute path of the file to be copied, that file is then excluded from the copying process. For example, if you specify the string "\Obj\", you exclude all files underneath the Obj directory. If you specify the string ".obj", you exclude all files with the .obj extension.
Example:
xcopy c:\t1 c:\t2 /EXCLUDE:list-of-excluded-files.txt
and list-of-excluded-files.txt should exist in current folder (otherwise pass full path), with listing of files/folders to exclude - one file/folder per line. In your case that would be:
exclusion.txt