Few Questions:
1) Whats the difference between non Converted Doodads and Converted Doodads?
2) Can I bypass the doodad limit by using "Convert to Terrain"?
3) How do I delete Converted Doodads?

1) Doodads are terrain and a sprite. Some doodads do not have a sprite. Converted doodads are simply the terrain version of the doodad.
2) Yes and no. There is a sprite limit of 499. Therefore you can't have more than 499 doodads with sprites (any more and the sprite just won't show up).
3) paint over it with terrain.

I would only use the convert tool for doodads with sprites or doodads that you want to modify, other than that use normal doodads because changing a lot of them to terrain has given me the "nooks and crannies error." And like rockz said, there isn't really a doodad limit just a sprite limit, so it doesn't really matter if they have no sprite.

On a side note, some Doodads can be quite interesting with their sprites removed. Converting a Doodad with a sprite into Terrain will allow you to edit or delete the Sprite. Attached is an image with some examples in Installation: normal Doodads on the left, spriteless on the right. In particular, the one near the top-right corner of the pic could be useful as a door or something.

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