Yes. You can record 2 different channels at the same time and watch a prerecorded show, while still recording. Dosen't matter if they're both HD or not.
This is what's called a 2-Tuner receiver.
If you have OTA, you can also record that at the same time. Record 3 HD programs at the same time while watching something else that you already recorded.
Yes it is amazing.
The second OUTPUT is SD only. All the tuners are HD capable. This fact is what causes the confusion.
You can watch HD content on TV2 or TV1 SD outputs, it is downconverted. In dual mode, you can record HD on TV2, even though it appears as SD on TV2 while you're watching it, you can watch it in HD from TV1 after recording.