The album artist is designated to attempt to keep all songs in an album together when there is more than one artist on an album.
For example on a soundtrack where every artist is different you might decided to call the album artist "Various artists"
In the case of a album with guests artists where each song is a duet and you might name each artist Johnny Cash & <blank>, Johny Cash & <blank2> etc, you might call the album artist just "johnny cash"
What would be nice is if one time down the line if you could name an album artist and browsing to that artist on the iPod would show all songs under that album artist, so you could find the song by browsing to johnny cash instead of having to go to Johnny Cash & <blank> Which neither iTunes or the iPod currently does...
It's basically an extra line of sorting and organization iTunes uses.