I had an inlay put in about a year ago. The dentist found a small crack in a tooth he was about to replace the filling in. He said an inlay should protect it from breaking further (I hope for a while at least) than a regular silver amalgam filling would and no one would notice because he could match my tooth color. The material he used was porcelain because of its strength and, like I said, he could match my natural tooth color.
To answer your question...an inlay is similar to a filling in that the porcelain goes on the chewing surface of the tooth. Onlays (my dentist described it as a partial crown) can be made of a number of materials like porcelain and basically covers one or more sides of the tooth. Depending on what coverage your tooth needs determines whether your dentist will do an inlay or an onlay.
I'm happy with my tooth. It's strong and doesn't give me trouble. However, that said, because of the expense, if I'm given this option on another tooth I personnally would think very hard and lean toward a cap. Just had one of those put in and it took the same amount of time (a couple of visits) and cost a lot less (at least at my dentist). Both of my teeth (the inlay one and the capped one) had root canals. I really don't know how one procedure over another will be affected if a non root canal tooth is involved. Anyway...my two cents.