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Option.xml files should never be Unicode--always ANSI. I know that's confusing because every other text file you create (rgu, initflashfiles) needs to be Unicode BOM.
Re-encoding the file to ANSI should work, but if it doesn't try making a brand new option.xml file and leave it in ANSI to begin with.
BTW I suggest notepad2 (google for it) for text editing. If you don't have that you should be using notepad (not Word or Wordpad or whatever).
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