How to use XInclude with xalan/xerces for XSD validation and XSLT?

I have XInclude working for XSLT using Microsoft's .NET API and now I am trying to incorporate it in my xsd file.

Does xerces/xalan implement XInclude? I tried performing an XSLT with the sample xalan command line too and while it did not give me an error it did not execute the include (i.e., insert the contents from the specified file).

I extracted xinclude.xsd from
http://www.w3.org/TR/2002/CR-xinclude-20020221/#syntax so I would not be
hitting someone's web site every time I validated my xml.

Here is the beginning of my xsd file:

Here are the errors I am getting from xerces' saxcount command line tool.

[Error] xinclude.xsd:3:62: src-import.3.1: The namespace attribute, 
'http://www.w3.org/2003/XInclude', of an <import> element information item 
must be identical to the targetNamespace attribute, 
'http://www.w3.org/2001/XInclude', of the imported document.
 
[Error] chameleon.xsd:66:75: src-resolve.4.2: Error resolving component 
'include'. It was detected that 'include' is in namespace 'xi', but 
components from this namespace are not referenceable from schema document 
'file:///c:/Documents%20and%20Settings/Administrator/My%20Documents/chameleon/xslt/chameleon.xsd'. 
If this is the incorrect namespace, perhaps the prefix of 'include' needs to 
be changed. If this is the correct namespace, then an appropriate 'import' 
tag should be added to 
'file:///c:/Documents%20and%20Settings/Administrator/My%20Documents/chameleon/xslt/chameleon.xsd'.
 
[Error] chameleon.xml:30:38: cvc-complex-type.2.4.a: Invalid content was 
found starting with element 'xi:include'. One of '{geometry-data}' is 
expected.
 
chameleon.xml: 328 ms (27 elems, 58 attrs, 0 spaces, 198 chars)

What am I doing wrong?

Since someone in another forum pointed out that my schema statement was inconsistency to my import statement (2001 v. 2003) I tried playing with this as well but no luck.

Thanks!
Siegfried