When creating\editing a SharePoint BDC metadata xml file using, Visual Studio you should set the schemaLocation value to C:\Program Files\Microsoft Office Servers\12.0\Bin\bdcmetadata.xsd. It can be represented in the LobSystem tag as shown below. If you open the XML file generated by certain tools like simego in Visual Studio, you will get warnings such as schema contains errors or file not found, modify the XML file as shown below to get intelliSense.

<LobSystem xmlns:xsi=http://www.w3.org/2001/XMLSchema-instance

 xsi:schemaLocation ="BusinessDataCatalog file:///C:/Program%20Files/Microsoft%20Office%20Servers/12.0/Bin/bdcmetadata.xsd"

Warnings shown in Visual Studio if value is not specified properly: The schema referenced from this location in your document contains errors.