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It seems like a race condition to me, i.e., this setting was being applied *after* xmodmap was executed from .xinitrc and was altering the changes done by xmodmap. As for why it was conflicting, it is because your keyboard.conf is changing the whole layout of the keyboard.
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You could add this option to the xorg configlet.
x33a is right about the altering nukes the xmodmap config (try setting the layout at runtime) but why this happes after the xmodmap call in xinitrc is beyond me. The server is up and should be initially configured when this is called.
The actual invocation (ie. how X is started and you login) could matter... *shrug*
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