Re: DOCBOOK: external entities cannot be valid?

Norm is right; this was the case with SGML.  You're just
encountering it for the first time, Bob.

What I do is essentially your choice C, so I wind up with
both

<?xml version="1.0"?>
<!DOCTYPE chapter SYSTEM "db3xml10.dtd" [
...
<!ENTITY ch9tfarn SYSTEM "ch9tfarn.xml">
...
]>
<chapter id="ch9.htm">
<title role="Chapter Nine">The Atabak&imacr;yah Architect</title>

&ch9tfarn;
...
</chapter>

and a similar wrapper file for the whole book.  In this case
the entities are sections.

As I don't use structured editing tools I've never encountered
the problems you're finding with them, though.       

regards, Terry