From the apple site.
Sound Check is a feature designed to allow you to hear all of your songs at approximately the same volume. You can turn Sound Check on and off in the Playback panel of iTunes preferences.
How it works
When Sound Check is on, iTunes scans the songs in your library and computes characteristics of their playback volume. As new songs are added, iTunes computes this information in the background. This data is stored in either the "normalization information" ID3 tag or the iTunes Music Library database. The audio data in your music files is never changed. If you encode or "rip" a song with iTunes, the sound check level is stored in the song's ID3 tags. For songs that were encoded with iTunes 1 or iTunes 2, or another application, the sound check levels are stored in the iTunes Music Library database.
When Sound Check is off
If you turn Sound Check off, the Sound Check data stored for each song is ignored, but not removed from the iTunes Music Library or the ID3 tags.
1. Sound Check is designed to work with .mp3, .AAC, .wav, and .aiff file types. It does not work with other file types that iTunes can play.
2. Any boosts in playback volume are designed to be protected against clipping by iTunes' build-in limiter.