ENTITY datatype

Hi all,

In the spec., it says:
   The value space of ENTITY is the set of all strings that match the
NCName
   production in [Namespaces in XML] and have been declared as an
unparsed
   entity in a document type definition.

My questions are:
   1. Does this mean XML Schema cannot live without DTD for some cases?
       What're the other occasions that DTD may need to coexist with
Schema?

   2. Where can the DTD that contains the declared unparsed entities
reside?  In
        the Schema itself (note that Schema is an XML document itself)?
In instance
        document?

Thx,

-Stanley