I got a strange issue with Adobe Media Encoder CS 5. When I convert .wmv to .flv my C drive memory gets decreased even though both source file and output file are in the E drive. In other words Adobe Media Encoder AME is eating my C drive. All Adobe products were installed in my C drive. I searched C drive with search option whether it left a copy of the outpout file but there is no trace of it. I stopped using AME since then.
Have you checked to see if it's the media cache that is taking up the space on your C drive?
See this page for information on the media cache.