The sets of monster cards are numbered 2-5. The rule book states you use the number equal to the number of players. Does that include the overlord?

4 heroes = #5

3 heroes = #4

When would you use #2? Can heroes really go solo?

It includes the overlord. You'll notice that the "2" cards have exactly the same stats as the "3" cards, due to the recommendation that a lone hero player should control two heroes.

Yes, you really can (and should) play with other numbers of heroes than the recommended, and you should use the monster stats equal to the number of heroes plus one when doing so.

Yes, this is unnecessarily confusing.