In our use of XML as a data parsing mechanism from/to our .Net layer and SQL Server 2005 we are using traditional relational structures (tables) to hold the data. The stored procedures take the input XML and selectively extract, using XQuery syntax, data values from it for DML operations against the tables. I.e., it is only used to simplify the data parameters to the stored procedures.

Similarly, we construct a single XML document from the relational structure, using FOR XML PATH, to return to the .Net layer vs. numerous result sets (i.e., a .Net DataSet) which the .Net layer would have to iterate through. See (one of) Jacob Sebastian's articles for some sample syntax: http://www.sqlservercentral.com/articles/XML/62289/

We are not, as you are proposing, attempting to use SQL Server 2005 as an object relational database utilizing XML and Annotated XSD Schemas. Therefore, I cannot offer any further assistance in this area.