The on-deck hitter is the batter scheduled to hit after the current one. He will usually take warm-up swings in the on-deck circle, which is located on the field but in foul territory. The idea is that the on-deck hitter already has with him his bat, helmet and other batting equipment and can come to the plate quickly once his turns comes up, not having to get dressed properly and come all the way from the dugout, thus eliminating needless delay in moving the game along.
The on-deck hitter is not yet announced into the game. A manager can send a potential pinch-hitter to be the on-deck hitter, and then change his mind, sending either the scheduled hitter or another pinch-hitter to bat, depending on the outcome of the at-bat. The replaced on-deck hitter can come into the game later, which would not be the case if he had been announced into the game, which happens when the preceding at-bat is over and the manager officially advises the home plate umpire that he is making a substitution.
The player scheduled to bat after the on-deck hitter is said to be in the hole since he is still in the dugout.