I don't have a "diff" folder either (where is that located, under the mame directory?). If you use wordpad to read the file, what exactly is in it? I went ahead and created it under the mame directory (along with memcard, sta, and inp which I didn't have either), but nothing is being dumped into the diff directory. Looking at the patch file, it appears that directory is the directory to save hard drive image difference files.
I just tried adding the lines to my mame.ini file that allow you to disable parts of the patch. It looks like the problem lies somewhere in the patch code for the nag screen, because if I use the following in my mame.ini the font problem / block character issue goes away:
#
# DISABLE PATCH OPTIONS
#
disable_hiscore_patch 0
disable_nagscreen_patch 1
disable_loading_patch 0
As soon as you enable the code for the nag screen patch, problem reoccurs.
danfman: Just out of curiosity, what kind of video card (and driver version) are you using on the system that has this issue?