You are correct in saying that a basic mosaic dataset is the replacement for a raster catalog.

The ArcGIS Image Extension can be optionally licensed with the ArcGIS for Server Standard or Advanced editions.

There are huge advantages to mosaic datasets, including the enablement of dynamic mosaicking to handle your overlapping images, and on-the-fly image processing where a variety of image functions can be applied on the server as the imagery is delivered to the user.

Existing ISDef files can be added to mosaic datasets for conversion.

This post discusses implementation of the second variety, which is known as a referenced mosaic dataset.

Follow the steps for the Create Raster Catalog tool, and make sure to specify the proper spatial reference.

In ArcCatalog, create the new file geodatabase by right-clicking on your folder connection and selecting New - file geodatabase.

Make sure to set the coordinate system in the Environments settings for the tool.

When it finishes, check the list of raster files that were added to the raster catalog in ArcCatalogs Preview tool.

Add raster files to the input list by selecting them from the ArcCatalog Contents window with the new raster dataset selected in the ArcCatalog tree.

Follow the steps for the Create Referenced Mosaic Dataset tool selecting the raster catalog created earlier, and make sure to specify the proper spatial reference.

Set privileges on the mosaic dataset, and then register the folder containing the imagery and the raster catalog with ArcGIS Server.

Until you zoom in, the image service will only show you a maximum of 20 rater datasets.

You can do this by right-clicking on the mosaic dataset name in ArcCatalog and selecting the Share as Image Service tool.

Make sure that the images displayed show pixels at the native image resolution when you zoom all the way in.

You can also publish a map service by adding the referenced mosaic dataset to ArcMap and publishing the MXD file as a map service to the ArcGIS Server connection.

You would create an empty mosaic dataset and then add source rasters.

You could then publish the mosaic dataset through the Image Server Extension.

A reference mosaic dataset is used to build derivative products from other mosaic datasets or an existing raster catalog.

For example, you could build a reference mosaic dataset from mosaic datasets of aerial photos from different years and display the latest available imagery at any location.

Another example would be creating a hillshade from a DEM by building a reference mosaic dataset of the DEM and applying a hillshade function to it.

They help you build multiple image products by using mosaic datasets and raster catalogs as raster sources.

Arcgis Image Extension