AAC means "Advanced Audio Coding", and in the beginning it was also called MPEG-2 NBC for "Non-Backwards Compatible" as opposed to the MPEG-1 and MPEG-2 BC (with 5.1 channels) standards. It is now considered to be the actual "state of the art" in general audio coding and the natural successor of MPEG-1/2 Layer III / MP3 in the new multimedia standard MPEG-4 that uses MP4 as the container format for all kinds of content.
AAC is able to include 48 full-bandwidth (up to 96 kHz) audio channels in one stream plus 15 low frequency enhancement (LFE, limited to 120 Hz) channels and up to 15 data streams. Besides it has further multi-language capacities.
Actually AAC comes in different "flavours" called Profiles (MPEG-2) or Object Types (MPEG-4) which make up a whole family of compressors that are not necessarily compatible to each other, especially for different players (see the MP4 and PsyTEL pages in this Wiki for more informations on this):
* MPEG-2 AAC LC / Low Complexity
* MPEG-2 AAC Main
* MPEG-2 AAC SSR / Scalable Sampling Rate
* MPEG-4 AAC LC
* MPEG-4 AAC Main
* MPEG-4 AAC SSR
* MPEG-4 AAC LTP / Long Term Prediction
* MPEG-4 AAC Version 2
* MPEG-4 AAC Version 3 including HE AAC
Some profiles are restricted in complexity, so they are easier to implement e.g. for portables, but have a slightly lower performance. Nevertheless LC is the most used profile nowadays even in PC-based applications, because the complex ones do not offer a much higher sound quality in exchange for the higher "costs" of implementation. This will become more obvious with the standardization and implementation of AAC+ / HE AAC, as all these former enhancements and extensions are aiming at a higher efficiency for low bitrate encodings, but only for special purposes like speech coding.
For more info about audio coding, check AudioCodingWike.