An add-on domain is a new domain name that points to a subdirectory within your existing domain hosting account, where the website for the new domain will reside. Add-on domains must be registered domain names that you own, and that are configured to point to your web host's servers.
From a web user perspective, an add-on domain functions just like any other domain. For example, if you already have a hosting account under www.main-domain.com, you can register and set up an add-on domain (for example: www.add-on-domain.com), so that when your visitors type "http://www.add-on-domain.com" in their browser, they will be transported to the new site.
The advantage of add-on domains is that the browser's address bar will show "http://www.add-on-domain.com" (there will be no reference to the original domain), so the process will be totally transparent to your users. If your users navigates to another page, their browser will accordingly show "http://www.add-on-domain.com/anotherpage.html", just like it should.
Apart from sharing web space and bandwidth with your main domain, add-on domains also get their own cgi-bin and statistics.