Does it convert the TV2 signal from SD to HD for some reason.
No of course not! The TV2 tuner is an HD tuner. The existing TV2 outputs are only SD, but internally the HD stream is there, whether it's coming off disk or direct from the satellite. The OP was talking about the HD Extender, which of course doesn't have anything to do with TV2 at all.
But a related device
does. At least, according to reports during CES, the TV Everywhere Adapter uses a single USB connection to take in the encrypted data stream, decrypts it, transcodes it, re-encrypts it, and sends it back over the same USB connection into the receiver for streaming out the Ethernet jack.
According to the 922 beta testers, the sling stream has at one time or another been locked onto the TV1 output and now the TV2 output. So, at least for the 922, this is software-selectable and currently using TV2 (as opposed to a TV3 output we heard of a year ago). Now if anybody has heard that the TV Everywhere Adapter is going to work off the TV2 outputs of existing VIP receivers, I haven't seen that specified.
It comes out of the USB and will be coming out after the 922 comes out. It is a type of sling catcher.
What comes out of the USB? The Extender is supposed to work off WiFi. Are you talking about the TV Everywhere Adapter too?