In the original vehicle the speed sensor (mounted on the gearbox) is wired to the speedo. No surprises there. But there is also some signal conditioning circuitry in the speedo head which converts the signal into something that the ECU understands. This signal is then wired to the ECU.

Often the original speedo isn't present in an engine transplant so there is no way to do that "signal conditioning" that happens in the speedo head. So an "interface" is needed to take the place of the speedo head. This will then keep the ECU happy.

The problem here is that you now have no way to connect a speedo cable up as there's a speed sender plugged into the gearbox. This isn't really the end of the world though. You just need an aftermarket electronic speedo. Sure, they'll cost you $250 or so but you'll end up with a reliable speedo that you can calibrate. So no matter what diff gears or tyre sizes you run, you'll be able to adjust the speedo electronically so it's always accurate. Sweet. VDO make a nice one...

How does the speed sensor work?

They are just a magnet and coil arrangement which gives an AC voltage which increases with rotational speed. To test it properly you really need an oscilloscope but a basic test can be done with a multimeter. Just set the meter to "AC volts" and connect a probe to each wire of the sensor. You should see a small AC voltage when the sensor is rotated. If you rotate the sensor faster (with a drill or similar) you should see the AC voltage go to around 2V or more.