An addon domain is a domain parked on a subdomain of the main domain, and pointed to a subdirectory of the main site. Therefore you can have several domains hosted in the same account and pointing to different content.
Addon domains can have their own POP accounts and can not have subdomains.
The advantage of having addon domains is you can manage them and a main domain with a single control panel.
To Explain in English, it works like Parked Domains, but instead of parking a domain on top of main domain.. (ie..
www.mysite.com (Main) has
www.mysite.net (Parked))
it lets you park on what *would be* a "SubDomain" (ie.. sub.mysite.com)
So with "Addon" you can have
www.differentsite.com point to a subfolder or your main site
www.mysite.com. Where with "Parked domains" This cant be done, and allows for the cheapest way to do what is called "Virtual Multiple Domain Hosting"