you guys are missing something:

“…you understand and agree that by submitting your Content to any area of the service, you automatically grant (and you represent and warrant that you have the right to grant) to Linden Lab: (a) a royalty-free, worldwide, fully paid-up, perpetual, irrevocable, non-exclusive right and license to (i) use, reproduce and distribute your Content within the Service as permitted by you through your interactions on the Service, and (ii) use and reproduce (and to authorize third parties to use and reproduce) any of your Content in any or all media for marketing and/or promotional purposes in connection with the Service;”*"

*the above basically means that basically the only legitimate use of the texture converter is a merchant converting their own textures for use in SL.
uploading an avatar skin to SL is basically giving Linden Labs a royalty free license to do whatever they like with that texture.
now guess what? when you buy a texture at renderosity, or daz, you do not have that right to give.

meaning that uploading your converted texture to SL is no different than uploading it to a warez site.*

the whole 'derivatives' issue is just another angle. that is debatable, this isnt. unless the merchant you purchased the texture from gave you permission to distribute it through second life, this is against the product EULA.