I use Photoshop, so Im not sure about Adobe illustrator, but I can tell you this much...
DPI is not the same as Size... DPI is Dots per Inch, meaning you can have 120, 300, 600, even 1200 DPI in a 1" x 1" square.
300 is good quality, 600 is great quality, and 1200 is Super High Quality!
Personally, if I was going to do an Overlay, I would do it at 600-1200 DPI, the only problem with doing it that high, is the file sizes are HUGE.
For example, a 27" x 15" picture, at only 72 DPI is 6 Megabytes, while the same picture (27" x 15") at 300DPI is 104 Megabytes, now go up to 600 DPI, your at 417 Megabytes, meaning the one picture alone you are going to have to burn to CD to get it printed at Kinkos. Wanna know how much 1200 DPI is for that same Image? Let me put it this way... only 1000 DPI at 27" x 15" is 1.15 GIGA Bytes.
Now, what does all that mean?
Well, ill show you... Please print each of the next three images, now if you open them, they will appear diffrent sizes, yet when you print them, they will be the exact same size, so dont worry about wasting ink, they are only 1" x 1"
Image 1, at 72 DPI
http://207.76.168.55/upl/72dpi.jpgImage 2, at 300DPI
http://207.76.168.55/upl/300dpi.jpgImage 3, at 600DPI
http://207.76.168.55/upl/600dpi.jpgAlso, the reason the higher resultion images are larger on the computer is becuase your Screen goes by DPI as well, your resolution determines your DPI, if your desktop is 800x600 then you have a total of 480000 pixels, now a 1" x 1" image at 300 DPI is about 90000 pixels, meaning that a 1" by 1" image at 300DPI on a 800x600 Resolution will take up about 20% of the onscreen image, that would be about 5.5" of a 19" monitor, even though it is only 1" x 1" when printed....
As you can see, after you print those three pictures, that you will want at least 300 DPI for any image you use to print. Anything less (even 120) is going to print pixelated and grainy.
Hopefully this has helped you understand the diffrence between the DPI and the Size of any given image.