The word notation means a note or an annotation. It's a means of communicating additional information. That's really what a notation is in XML, as well—it is a means for an XML parser, reading the XML file, to pass additional information along to the program that will be using the XML file.
Notations come in handy when you want to include binary data with your XML documents. For example, if you wanted to include a GIF in your XML document, you couldn't just cut and paste the GIF into a text file. Instead, you would need to point to the GIF somehow. You can actually include a reference to the external graphic, either as an attribute or an entity.
XML Schemas actually provide two datatypes specifically for this purpose. If you are ...