The Squeezebox is a thin client. It interacts with a server program running on another network machine. Simplistically, the SB3 is a remote control front end that displays stuff as told by the server program, manages commands (like add this song to the current playlist), and is set up to receive music files and output those files through a coax digital port or analog L/R jacks. Its a non-functioning lump without a program running on another machine to support it, but... One server program can support multiple SB3s, and the "program" supporting them runs in the background.
So, I've got the server program (slimserver) running in the background on my XP machine in my study. The SB3 in my bedroom wakes up, sees that program, and starts interacting with it.
Theoretically it can interface with iTunes in the sense that you can tell the server program to look for an iTunes library file to manage the library. That means changes in the iTunes library are recognized by the slimserver program. I say theoretically because I'm spending my morning trying to make that work. There seem to be some issues with finding files over a network... Aie.