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In section 3.3.3, step 2.2 reads: If ref is present, then all of <complexType>, <simpleType>, <key>, <keyref>, <unique>, nillable, default, fixed, form, block and type are absent, i.e. only minOccurs, maxOccurs, id and <annotation> are allowed to appear together with ref. It should probably mention <alternative> and read: If ref is present, then all of <complexType>, <simpleType>, <alternative>, <key>, <keyref>, <unique>, nillable, default, fixed, form, block and type are absent, i.e. only minOccurs, maxOccurs, id and <annotation> are allowed to appear together with ref. At least, I think that is the intention.
The WG decided this issue, to replace the errant text with the following: If ref is present, then no unqualified attributes are present other than minOccurs, maxOccurs, and id, and no children in the Schema namespace other than <annotation>.
The text given in comment 1 has now been integrated into the status quo document at http://www.w3.org/XML/Group/2004/06/xmlschema-1/structures.html#sec-src-element (member-only link) Accordingly, I'm marking this issue as resolved. Kevin Braun, as the originator of the bug report, you are invited to indicate either that you are happy with the resolution of the issue (by changing the bug's status to CLOSED) or else that you are not happy (by reopening it and explaining what's wrong). if we don't hear from you in two weeks, the WG will assume you are happy.
The WG reported this bug as FIXED on 2010-08-16. We are closing this bug as requiring no futher work. If there are issues remaining, you can reopen this bug and enter a comment to indicate the problem. Thanks very much for the feedback.