xmlspy: does ##other apply to only subsequent target ns

I'm playing with XMLSpy and its validator (thought there is a schema
question in here), and it objects to the following instance:
<KeyInfo>
  <KeyRetrievalMethod URI="someKey"
   Type="http://www.w3.org/2001/02/xmlenc#EncryptedKey"/>
</KeyInfo>

in that KeyRetrievalMethod should be from an "##other" namespace.

xmlenc's KeyInfo is defined as:
<complexType name='KeyInfoType'>
  <complexContent>
    <extension base='ds:KeyInfoType'>
      <sequence>
        <element ref='xenc:KeyRetrievalMethod' minOccurs='0'/>  
      </sequence>
    </extension>
  </complexContent>
</complexType>

ds:KeyInfoType permits ANY from ##other among other things.

Now is this error from: 1. an include/extension adds the included
namespace to its concept of self (either in schema or a Spy bug?) (I think
this is unlikely) 2. the validator is trying to validate the
KeyRetrievalMethod under the ANY constraint in the ds:KeyInfoType
(wouldn't this still work assume #1 above is wrong?) instead of the
KeyRetrivalMethod enc:KeyInfoType?

This has also got me to wondering about the ordering/precedence of
extensions. In [1] I presume the state/zip must come after
name/street/city in a sequence. What is the content model of the derived
type if state/zip was actually a choice content model?

[1] http://www.w3.org/TR/xmlschema-0/#address.xsd

Regards,              | GON OUT	|
		      | BACKSON	|
Joseph M. Reagle Jr.  |  BISY	| 
reagle@m...        | BACKSON | http://reagle.org/joseph/
PGP ID:    0C 69 D4 E8 F2 70 24 33  B4 5E 5E EC 35 E6 FB 88