About iTunes libraries and media folders
There are two main components you deal with when organizing your music with iTunes: the iTunes library file, and the iTunes media folder.
The iTunes library file is a data file that keeps track of the contents of your iTunes library. This includes the list of all the music and video tracks you have in the library, as well as any playlists and smart playlists you have created. The library file also contains various information you assign to your tracks in iTunes, such as ratings, equalizers, volume adjustments, and more. By default, this file is located at ~/Music/iTunes/iTunes Library (where ~ represents your home folder). For simplicity, PowerTunes creates new libraries by default in ~/Music/PowerTunes, but you can also create a library file in any location you choose, including on an external drive or a network drive.
The iTunes media folder is a folder that contains the actual music and video files that iTunes refers to. It's important to know that the contents of the media folder don't necessarily match the contents of the library itself. There can be files in the media folder that aren't in the library, and you can also add files to the library which aren't in the media folder. By default, the media folder is located at ~/Music/iTunes/iTunes Music.
With PowerTunes, you can create any number of separate libraries, as well as any number of different media folders. Each library refers to a single media folder, and multiple libraries can use the same media folder if you wish.
Typically, each iTunes library is kept in a separate folder, along with several auxiliary files/folders that iTunes creates alongside the main library file. These items include:
Album Artwork: This is where iTunes stored downloaded and cached versions of album artwork for your library.
com.apple.iTunes.plist, com.apple.iTunes-ByHost.plist: These files are actually put there by PowerTunes, not iTunes. PowerTunes keeps a separate set of preferences for each of your libraries, and stores the saved prefs for a library in these files alongside the library file.
iPod Games: If you purchase games for your iPod on the iTunes store, iTunes saves them to this folder, rather than in the main iTunes Media folder.
iPod Games Library: Earlier versions of iTunes also keep a separate library file for keeping track of iPod games.
iTunes Library: This is the main iTunes library file, as described above.
iTunes Library Extras.itdb: A database file iTunes uses to store information from CDDB
iTunes Library Genius.itdb: A database file iTunes uses to store information for generating Genius playlists
iTunes Media: The default folder that iTunes uses to store music for an iTunes library, alongside the iTunes library file. (iTunes 8 and earlier names the folder "iTunes Music" instead of "iTunes Media")
iTunes Music Library.xml: This XML file is written out by iTunes so that other programs, such as iPhoto and iMovie, can easily read the contents of the iTunes library. Editing this file has no effect on the contents of the iTunes library, and any changes will be overwritten the next time iTunes saves its library file. In locations other than the default music library, this file is named "iTunes Library.xml" instead of "iTunes Music Library.xml"
Mobile Applications: Contains iPhone and iPad applications downloaded from the iTunes App Store. Note: as of iTunes 9, this folder is now stored by default inside the iTunes Media folder
Previous iTunes Libraries: Each time you install a new major version of iTunes, a backup copy of your iTunes library file is created in this folder by iTunes, in case you have problems and need to revert to a previous version of your library.