Everything you'd ever want to know about the Bosch Motronic DME can be found here:
http://frwilk.com/944dme/hfm.htm
For what it's worth, the speed sensor is the only source of engine speed info; the DME controls the ignition and provides the tachometer signal based on it. The refrence sensor is key to getting the spark at the right time; the DME has to know where in the cycle it is so it can advance or retard the timing.