Welcome to GEH! We hope you enjoy it here
To answer your first question, an overlay is a photo off the internet (or your hard disk) that sits ontop of the google imagery, you can see things that arent in the current imagery in google earth either because its too old, too new, or in low res.. a great example of this is Palm Island, Dubai You can turn them on & off by using the checkbox next to the overlay in your "My Places" section, you can also adjust the opacity by moving the slider at the bottom of the "My Places" window when you have the overlay selected.
Your next question, a KML file is like an xml file but specially made for Google Earth so it knows to open it, it contains the co-ordinates and any other information relating to your placemark so that you can share that spot with other google earth users. A KMZ file is a specially formatted .zip file (again, so google earth knows to open it) which contains a KML file and also any images you may have attached to the placemark. You can make either of these by right-clicking a placemark in 'My Places' and selecting save as, you can then upload it to the site via an attachment on the forums, or to our file archive where one of us mods will approve it and add a thumbnail
If you have any further questions please dont hesitate to ask!