i'm not sure if i fully understand notifications.
i believe it brings to ones attention if someone does any of the following:
- favs your work
- replies to a thread you created
- posted a comment to something you submitted
- leaves a msg in your guestbook
am i missing anything?

my real confusion is about what happens when you have the
notification "marked as read". does it just clear that notification so that it's not part
of the # of notification count?

You also receive notifications when your friends submit a review, send you a PM, make a submission, create a thread, and/or add you to their friendslist. Furthermore, when you do select specific notifications or even all the notifications, after clicking Mark As Read, those notifications will be cleared from the list.

Also it notifies if a moderator deleted you wall/ scan whatever.