An overlay is an endpoint that implements a relationship between two spaces. An overlay exists as an endpoint in the host space but delegates any sub-requests it issues into another wrapped space.
Transparent Overlays wrap another space transparently exposing it's address space into the host space. They may intercept the requests and/or response changing characteristics thus the word transparent applies to the transfer of addressable resources rather than the behaviour of those resources.
Overlays have many varied uses in structuring an application and NetKernel contains many examples in it's libraries. For a more detailed discussion see the ROC in a Nutshell book.