When a project is shared on the Scratch Website, it is open to the Scratch Community to view and report. The state of a project after being reported is its review status. Only the Scratch Team can see the review status.
There are four statuses a project can be in. The first is for before a project has been reviewed, and the other three of them are only for after it has been reviewed.
When a project is uploaded, it is automatically placed in the "unreviewed" category. A project is in this category until it is reviewed by a member of the Scratch Team. The majority of projects are unreviewed due to the immense amount of projects constantly being uploaded to the site.
If a project has been reviewed and deemed appropriate for the Scratch community, it is marked For Everyone (FE). These projects have no restrictions placed on them.
Not For Everyone
If a project is deemed inappropriate for the community, but is not bad enough to be censored or removed, it is marked Not For Everyone (NFE). These projects cannot get onto the Front Page and will appear rarely in the search results. NFE projects may be marked as such because of any minor violence, rude words and concepts, or other similar things. Projects using animated thumbnails will also get marked NFE because they may lag the front page (though some users may not notice it) and could be very annoying to some users. If someone uses other accounts to love and favorite a project multiple times to get it Front Paged, it will be marked as Not for Everyone and that user will most likely get an alert on their profile. 
Sometimes the Scratch Team will remove a project from the publicly visible list of projects, generally if it breaks the Community Guidelines. If a non-Scratch Team member or someone who didn't create the project tries to access the project, it will show a 404 not found page.If the user gets their project removed, they can remove all of the offending content and reshare the project. However in rare cases, the violating project can be permanently unshared, which means the user cannot reshare the project.
To report a project, click the "Report this" link below the project. The user will be asked to type in a reason, after which they will be asked to confirm that they are reporting the right project for the right reason. Once this is done, the project appears on a page visible to the Scratch Team that lists reported projects. They will review it, and mark its review status.
While many projects are reviewed because they were reported, some are also reviewed when Scratch Team members stumble upon them.
The same process is used to feature a project.
If a project is reported multiple times by multiple people, it is automatically censored until reviewed by a Scratch Team member. In Scratch 1.4, when a user visited the project, they used to be shown Gobo giving a message explaining about reporting, but in 2.0, they now just see a 404 page.
- A post by andresmh explaining how the Scratch Team deals with flags
- What does the Scratch Team do when they find something inappropriate? — forum post