Ok, I'll try to explain as far as I understand it (*). To know what
boxes are in a TeX context and how it places them you need to know about TeX's modes. There are six different modes Tex and hence LaTeX can be in when parsing a document. I'll only explain four of them: 1) horizontal mode 2) vertical mode 3) math mode and 4) display math mode.
When TeX sees the beginning of a paragraph it goes into horizontal mode. There every character is interpreted in a box and all these boxes are glued together into a long line, the horizontal list, until the end of the paragraph is reached. Tex now tries different scenarios of breaking this horizontal list into several lines that build the paragraph. Once it has done so TeX goes into vertical mode and the paragraph is set as a large box on the vertical list, i.e. a long list of paragraphs.
Since TeX doesn't know anything about letters but only sees boxes of different height, depth and width a box can in principle contain anything, e.g. a tabular, say.
Math mode is similar to horizontal mode but characters are seen as different boxes and spacing is different (there are other differences, really, but my knowledge is not deep enough to explain them). Again the boxes are glued together and after leaving math mode the resulting boxes are placed on the horizontal list.
Display math mode is again similar but the resulting list is placed on the vertical list.
amsmath's
\text
macro temporarily leaves math mode and goes into horizontal mode (not quite true again, I believe). The
{itemize}
environment internally starts a new paragraph which means it goes into vertical mode first. As this is impossible in math mode we need to give LaTeX a chance to do so by putting it into an appropriate (that is vertical) box which is done by
\parbox
here.
I hope this at least made some sense...
You can find an overview over LaTeX's box macros here:
What are the different kinds of boxes in (La)TeX?
Regards
(*) I hope someone will correct me where I am wrong.