You can, of course, record anything from any of the 3 inputs (coax, s-vid, composite - doesn't matter) while watching something you already have recorded. But you cannot use the Replay to record one thing & watch something else live through the Replay - unless you use the Bypass feature (which is why its there).
But personally, I never use the Bypass, I just have coax feeding all devices (replay, vcr, cable box, tv) and all (except TV) then pass s-vid back to a switch, and then to the TV. Same with audio, only through receiver instead of switch. Actually, I never use the Replay for live TV - just for recording and playback. But then again, I almost never actually watch live TV, except sports - and they show plenty of instant repeats as it is!