I found the solution. As it turns out...you have to use the namespace alias in front of each node the the xPath query. Like this:

select customerid,
	   name,
	   phonenumbers
from customers
where phonenumbers::exist('namespace PN="http://www.mytest.com/schemas/phone" /PN:PhoneNumbers/PN:Phone[@Type="Cell"]')=1

>Why doesn't this work!?
>
>In a new database, I created a schema:
>
>

>create xmlschema
>'<?xml-version = "1.0" encoding="utf-8" ?>
><xsd:schema xmlns:xsd="http://www.w3.org/2001/XMLSchema"
>targetNamespace="http://www.mytest.com/schemas/phone"
>xmlns= "http://www.mytest.com/schemas/phone"
>elementFormDefault="qualified">
> <xsd:element name="PhoneNumbers">
>    <xsd:complexType>
>      <xsd:sequence>
>        <xsd:element maxOccurs="unbounded" name="Phone">
>          <xsd:complexType>
>            <xsd:attribute name="Type" type="xsd:string" use="required" />
>            <xsd:attribute name="Number" type="xsd:string" use="required" />
>          </xsd:complexType>
>        </xsd:element>
>      </xsd:sequence>
>    </xsd:complexType>
>  </xsd:element>
></xsd:schema>'
>

>
>Then created a table:
>
>

>create TABLE Customers (
>	CustomerID uniqueidentifier primary key DEFAULT newid(),
>	Name char(50),
>	PhoneNumbers xml ('http://www.mytest.com/schemas/phone'))
>

>
>Then inserted a few records:
>
>

>insert into customers (Name, PhoneNumbers)
>values
>	('Jurden, Dan',
>	'<PhoneNumbers xmlns= "http://www.mytest.com/schemas/phone">
>		<Phone Type="Cell" Number="9792514509"/>
>	</PhoneNumbers>')
>	
>insert into customers (Name, PhoneNumbers)
>values
>	('Jurden, Ann',
>	'<PhoneNumbers xmlns= "http://www.mytest.com/schemas/phone">
>		<Phone Type="Home" Number="9798305351"/>
>	</PhoneNumbers>')
>

>
>So far, so good. Now I try to use some of the XML methods and cannot get them to work. For example, this should return the Customer "Jurden, Dan". But it returns nothing.
>
>

>select customerid,
>	   name,
>	   phonenumbers
>from customers
>where phonenumbers::exist('namespace PN="http://www.mytest.com/schemas/phone" /PN:PhoneNumbers/Phone[@Type="Cell"]')=1
>

>
>What am I doing wrong?
>
>BTW, this works fine if I don't use the schema binding.