yes the conversion happens. Both outputs are live no matter which input you are using.
RE the codec. The beauty of this thing is it's simplicity. I assume it is so cheap because they didn't have to add a bunch of codecs to it. They didn't try to make it a swiss army knife. It's a single purpose blade. Perfect for certain things. (Blue Screen shots, things you need to track, effects work.) I bought two SSDs at 256 gig each. Yes that's 50 minutes. I don't expect to ever need more. At least not until the price drops significantly. In indi film I really don't need more recording time then this. I can shuffle the files off to spinning disks faster then I fill up the drives. But yeah. If you shoot lots more footage per day, this isn't for you.
But if they are going to pick another codec I hope it isn't a closed one like pro res. Needs to be an open codec.
If it did ProRes (or better still DNxHD since Final Cut has suicided) I would order 6 of the rack mounts and 6 of the camera mounts (that stupidly dont have a V-lock mount option) units tomorrow. No kidding. Do it and I'll write the purchase req. 6 in the truck as iso-recorders and 6 on the back of our older JVC HD-251E's to do away with the evil HDV.
Meanwhile, we have been using the Ki-Pro to great effect in this situation.