Thanks for the reply, Vince. That's very helpful, but let me explain what I meant by "keeping the overview rasters out of ArcSDE."
In my initial post I did not mention there is an existing reference mosaic dataset in the SDE gdb that I'm referring to in this thread. Last week I ran Export Raster Catalog Paths on it (because Export Mosaic Dataset Paths does not work for a referenced mosaic), and in the output found paths that do indeed point to TIF files on disk, as would be expected. I did also, however, find dozens of paths similar to the following two:
\\winston\GISImagery\SWOOP2010\orthos\overviews\viewer1@bc@winston.sde\bc.GIS_ADMIN.AMD_SWOOP2010_OVR\\Ov_i05_L01_R00000972_C0000038C
and
C:\Users\kraemerj\AppData\Roaming\ESRI\Desktop10.1\ArcCatalog\sde@bc@winston.sde\bc.GIS_ADMIN.AMD_SWOOP2010_CAT\Raster.OBJECTID=18853
By the way, I don't know why the sde@bc@winston connection appears in some paths because I never create feature classes as the sde user. This mosaic had been loaded from a raster catalog, so perhaps it had something to do with no coffee the morning I created that catalog 😉
The overviews folder on disk (named in the first path above) contains nothing but two .sde connection files, so from these facts it appears the overviews are indeed stored in the SDE gdb. I've just checked the tool help for Build Overviews, and found:
"The overviews generated for mosaic datasets on the SDE are stored within the geodatabase containing the mosaic dataset. These locations can be changed by first using the Define Overviews tool and specifying a location."
So based on the fact I could use Define Overviews to specify the output location for overviews to produce them on disk, regardless of whether SDE or fgdb is host for the mosaic, and that mosaic performance hosted in SDE vs. fgdb will be just minimally different, my question becomes "is it better for image service performance to generate mosaic overviews on disk, or allow them to be created in SDE?