[MVP reporting on behalf of community member from http://forums.msdn.microsoft.com/en-US/asmxandxml/thread/7e425e82-be1f-4bcf-9513-862ea1ecf487]
A particular set of classes are created by hand. XSD.EXE creates a schema from those classes. It is then asked to create classes from the schema that it created. It generates a property of type string from the schema that it generated itself, instead of generating TheBaseType.
I was able to reproduce this on VS2008 SP1 Beta 1. The original poster says: "I am using VS2008 (9.0.21022.8 RTM), Team System Development Edition, with .NET 3.5. The version of XSD given in the generated code is 2.0.50727.1432. The OS version is Windows XP Professional SP2. VS has VB 2008, VC# 2008, and VC++ 2008, according to the Help/About... window."