david is correct, but the much better way for fixing this is to generally define locally defined elements as qualified in the schema. XSD has a terrible default there (which is the reason why your XSD did not work as intended), so virtually all tools generate an empty schema as this:
<?xml version="1.0" encoding="UTF-8"?><xs:schema xmlns:xs="http://www.w3.org/2001/XMLSchema" elementFormDefault="qualified" attributeFormDefault="unqualified"></xs:schema>this essentially does the same thing as the fix suggested by david, but does it by changing the XSD default, which is more robust.
the explanation of what exactly is going on might take a little too long to include here and is probably not of that much interest.
