1. You realise that their is no such directory called C:\ on the device. This path only exists on PCs never on devices. Locations on devices are of the form \Programs Files\some folder or \My Documents\some folder

2. Since you are using it on the emulator you give it any of the locations available on the emulator. These folders NEED to exist before you can write to the so you need to use Directory class and the create/new method.

so example
system.io.directory.create("\My Documents\My New Folder\")
Dim xtrXSD As New XmlTextReader("\My Documents\My New Folder\states.xsd")
statesDS.ReadXmlSchema(xtrXSD)
xtrXSD.Close()