AAC - Stands for Advanced Audio Coding. It is a newer kind of audio file that has been promoted as a successor to the MP3. It offers higher-quality sound than an MP3, but takes up about the same amount of space. It is a standard that was developed by a group of companies.
iPod comptabile: Yes
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AAC is the the format that songs sold from the iTunes Music Store come in. Any song or album purchased from the iTunes Music Store comes as an AAC and works with all iPods.
AAC files purchased from iTunes can only be "authorized" to play on a maximum of 5 computers. This is a form of digital rights management. Computers can be authorized and deauthorized regularly, depending on your needs.
AAC files can be used on some other portable audio players, including Microsoft's Zune and Sony's Playstation Portable.
