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The template code itself does not include the XML encoding reference, just when it is opened and displayed on the screen as an untitled-document.
I have tried unselecting the "Make XHTML Compliant" in the New panel and the Preferences panel, but this only stops the XML encoding reference from including in the new HTML pages I create, not the templates.
If someone could give me a method to stop Dreamweaver adding this code when opening a template, I would be very grateful. Been working on it all day.