When the output format for the conversion is HTML or XML, the location of each extracted image or attachment will be stored as a link. While outputLocation must be a folder name, outputReference should be the equivalent location expressed as a URL, so it will work when used in the links in the conversion output.
For example, on a web server outputLocation might be c:\inetpub\user1\temp and outputReference would be the virtual path to this folder, /user1/temp.