Can you elaborate on what you mean by "inlining the data definition"; I'm intrigued by this use of xml schema, but having a hard time fully getting my head around the benefit.
Sure; it's also called "Russian Doll" design in certain cases; see http://www.xml.com/pub/a/2000/11/29/schemas/part1.html
Don't define types, only define elements, and either "inline" those elements directly within the containing element (as shown above), or use the "ref" item to do the equivalent of #include. :)