I remember running into this problem last year, and I solved it by working with Visual Studio 2005.

Does VS 2008 not have an xsd designer?

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It wasn't released until VS2008 SP1, so it might not be in your version, but you should be able to download it.

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But wow, its terrible. Sticking with 2005. – bobobobo Dec 1 '09 at 18:56
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