Question

Something that has been bothering me since I started using drupal is how exactly does the php engine know which $node/$classes/$attributes you are referring to in template files. these variables are never declared as globals, so how does the php engine figure out what “$node” you are referring to??

Answer 1

See http://drupal.org/node/223430 which states

The main role of the preprocessor is to set up variables to be placed
within the template (.tpl.php) files. From Drupal 7 they apply to
templates and functions, whereas in Drupal 6 preprocess functions only
apply to theming hooks implemented as templates. Plain theme functions
do not interact with preprocessors.

Look at the template_preprocess* and the template_process referred to in the API. These functions show you the code that set up the various variables that you can access in your node template.

In a similar manner, you can also add your own preprocess code in a theme function to add to the variables available in your tpl.php file like so:

/**
 * Implements hook_preprocess_HOOK().
 */
function MY_MODULE_preprocess_node(&$variables) {
   $variables['hello'] = 'Look at me now!';
}

After this, you can reference $hello in your node.tpl.php file.