When installing ROS in Ubuntu from Debian packages, all packages are installed in /opt/ros/... and owned by root. That allows you to use them but not to change any source code or have additional custom packages that are compiled from source. An overlay is essentially a directory somewhere in the user's home directory that contains additional ROS packages. It is basically the user's workspace.
Originally posted by Lorenz with karma: 22731 on 2012-09-10
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Comment by joq on 2012-09-11:
See also: http://www.ros.org/wiki/fuerte/Installation/Overlays