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I18N approached the Schema WG about this topic. Essentially, the issue is that language "elements" like <xs:element> are spelled in English. This limitation can be a severe hurdle for people who would like to use the technology but who either don't speak English, or who don't speak English well. There are at least two ways this requirement might be addressed: 1) using substitution groups to define a "substitute language". 2) using an "approved catalog" of name mappings. The first solution depends on XML Schema itself, and might require adjustments to the proposed 1.1 Recommendation. The second is possibly orthogonal to the REC. http://lists.w3.org/Archives/Member/w3c-xml-schema-ig/2008Apr/0004.html
The Working Group discussed this issue today at its telcon. We weren't quite sure what to do with it; proposals included reclassifying it as an enhancement request for a future version, resolving with disposition LATER, and closing as WONTFIX on the grounds that the specific task described is outside the scope of the XSD spec. (The counter-argument for this was that the job of XSD or any schema language is to ensure that something like what is described is possible, and that we need more study to understand the problem area better.) In the end, those present on the call decided to close the issue as WONTFIX; the staff contact is recorded as dissenting on behalf of his colleagues in the i18n activity. David, please indicate your willingness to acquiesce in this disposition by closing the issue, or your unwillingness to do so by reopening it.
It should also be mentioned that some WG members on today's call argued that the fate of this issue is intimately bound up with bug 5764: if we had that, they said, we would have this, and without it not. But we did not decide to create a dependency between the two bugs, owing primarily to time pressure, which prevented the exploratory discussion necessary to find out whether the group had consensuse on the dependency relation.