I hit the same problem you saw when I was converting some videos to audio only yesterday, using a local library on the PC that is usually my MC Client. I had left the cache settings in my local library at the default, which meant media was being cached under my User directory. I started to run out of space on my SSD boot drive. Scary.
Based on my observations, most good media conversion software uses a cache of some sort, many to speed up the process, but also so that conversion can be completed before anything is written to the target location, and when it is written to the location, the whole, complete file is written at once. This means, for example, that MC won't try to import the partially converted file before it is ready to be imported.
To make matters worse for me yesterday I also edited the audio files resulting from the conversion above, using Adobe software. I had also left the caches for Adobe set to the default, which was the boot drive. Argh! You chewed up a mere 12GB. I was up to 65GB of cached media and still growing when I noticed the problem.
Now all my MC and Adobe caches have been set to a working drive with lots more space than my little SSD boot drive. I recommend everyone does that.
If I never plan to use the actual handheld sync, does the conversion cache provide any benefit?
If you are never going to use a handheld sync, and are just using the function to convert large numbers of file, there would probably be limited benefit in having MC use a cache. Just be sure the target location for the handheld sync is not a folder watched by MC. But you wouldn't want MC to import the result of a handheld sync anyway, so the target folder shouldn't be watched.
I was doing this to then manually sync to my handheld, but I suppose in the future if I was to plug and unplug my handheld, having a cache of converted files would be beneficial.
Correct. If you are using the handheld sync function to directly sync with a device, and you don't completely refresh the device every time, so that some songs are retained and some are changed, then a cache saves you the time and MC the effort of converting the retained files again. I'm not sure what the space implications are when using a cache though, as I'm not sure when cached media is deleted from the cache.
Of course, if I do that, it wouldn't be to the server device that I'd plug it in, it would likely be to a client. So does having it on the c:\ on the server help?
Regarding using the MC cache if you were going to sync a handheld, I don't believe it would matter if you did that on either the MC Server or the MC Client. As I understand it, the cache must always be on a drive accessible from the Server, and even if you sync from a Client, MC will use any converted files already in the Server cache. I haven't really tested that though.
Finally, I used to do what you were doing, and I might still go back to that. i.e. Use handheld sync to convert media to a format suitable for my iPhone, and save it to a folder defined as a Device. Then drag and drop the results into iTunes to sync the media to my iPhone. Then I discovered the function "File>Export to iTunes & iPhone" and tried that. So far, with one test, that worked well for me, as I am not so much syncing as just loading media on to the iPhone. However, that function is only available when using a local library by the look of it. So either I have to use the MC Server to do it, or use a local library on the PC that is usually a Client. I did the later, and that is fine for the moment.