Maybe I'm missing something, but I tested this on a file on a network folder and then again on my local desktop to be sure and the same thing happens. I set a deny delete permission for the everyone group on some file - and then i delete it! Why isn't the deny permission taking effect? When I view the effective permissions it shows that I do not have delete access.

Never mind http://support.microsoft.com/default.aspx?scid=kb;en-us;Q308419 explained it.