This feature has been replaced by product groups.  See kb 165 linked below.

You flag a related item as an add-on or upgrade to signify that the products are tied together in the cart and on the order.  In other words, if it's an upgrade or add-on, the products will display together.  If you remove the parent product, the "child" product is removed too. 

An add-on is like an upsell specifically for that product, but is a product all on its own as well.  For instance, a shirt may have an add-on of embroidery, or a game console can have memory upgrade add-on. These items are tied to the parent item in the cart.