Your original post stated “i am trying to create a xml schema from a xml” and said nothing about an XML Schema (XSD). The error message you are getting is the one returned when you attempt to create an IS Schema from an XML document that does not refer to a DTD.
If you’d like to post the XSD that is giving the problem, I’ll try to take a quick look. Otherwise, I won’t waste my time guessing on what might be the issue.
IS has no problem creating IS Schemas from XSD’s which use choice models, unions and other fun XML constructs. You just have to stay away from recursive (self referencing) definitions. See the IntegrationServerSchemaReference.pdf document for more about IS Schemas.
Mark
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