Geez, I'm not sure it's possible to answer this question without seeing exactly what you're talking about... I think it's a matter of degree, and a matter of your personal riding mechanics.
When I am "low" in my drops (elbows bent a significant amount), I have a good deal of elbow/knee overlap. It's not a problem since I ride with my knees pulled in pretty close to the top tube, so my knees aren't hitting my elbows. However, is your position such that when you are in the drops, your thighs hit your chest? If that is the case, that is a bit of a fit problem, and probably means you need to have your bars higher (not necessarily closer). When your knees are hitting your chest, it restricts your range of pedaling motion and probably puts you in a crunched up position that constricts your breathing (and it's not very comfortable). I guess I wouldn't be inclined to worry about the knee/elbow relationship in and of itself very much -- it's more a question of how you feel on the drops, and whether your hip angle is really crunched up (I bring this up because *if* you are crunched up, it's almost certain that you will have a lot of knee/elbow overlap -- but you could have overlap without being crunched up).
Other people who know more than me will probably be able to help more

.