Hi John --
I don't understand the problem, I'm afraid.
If the problem is that the XML in the raw traffic is that it's escaped, that is not a problem. It needs to be escaped because it would be invalid XML if the exact string <?xml version="1.0" encoding="UTF-8"?> is embedded inside the message, rather than as a top element (and it's invalid to have more than one of them in an XML file). Look at the top of your raw traffic XML, and you should see that it starts with that declaration.
So, I would always expect a raw recorded message to be escaped in a raw traffic file, starting with <?xml version="1.0" encoding="UTF-8"?>, and I would expect DevTest to automatically translate the whole escaped message into XML in a VSI, which is what I believe I'm seeing in your VSI extract.
The problem that I think I see in your extracts is that a SAX parser has choked during the recording process, on some invalid XML presented to it, and so DevTest has stored what it can, and has presented that to you. It might be that it was the SAX parser in DevTest that saw invalid XML, but it looks to me that the real back-end uses the SAX parser which responded with an error code and a MessageDescription including the embedded parser error and DevTest correctly recorded that.
Rick