Well I don't have a 721 but do have 522. But I might have an answer for you..
The 522 can be hooked up like you describe and you can use the TV's PIP to swap out between the TV1 and TV2 feeds. But the 522 has 2 separate modes-single and dual mode. In the scenario you described it is in dual mode. If you have the TV2 output going to another TV it would probably be set in dual mode. But the 522 in single mode can do the same thing without having the TV2 output connected. It uses it's own PIP in single mode as opposed to using the TV's PIP.
The 721 if I understand it correctly acts like a 522 in single mode. It also uses it's receivers PIP as opposed to the TV's PIP.
Using the 522 in single mode ( and I assume using the 721 is the same ) is just like using your TV's PIP to toggle between video inputs. You can bring up the PIP window..move it's location on the screen..and swap the pictures out. Your just using the receivers PIP capabilities instead of your tv's.
If I'm not explaining it well maybe this will be clearer...if instead of your cool Hitachi with built in PIP you had an old 13 inch black and white made in 1975- with a 522 in single mode or a 721 hooked to it you could still get PIP since it's done through the receiver.
As far as which is better to use-the PIP functions work just like your TV's as far as i can tell.
If you got a 522 you might want to have it in single mode because then ALL of your PIP functions would be on the 522 remote. One thing I couldn't get my 522 remote to operate is the TV's PIP features. But that wouldn't be needed if the 522 was in single mode.
As far as the 522 vs 721- well like I said I only can speak for the 522 and I've had it for about six weeks. This is my first DVR and I like it alot. I haven't had as many problems as some in this forum have reported but do get the occaisional sound dropout or picture pixellation but nothing major. Hope the new software coming out will fix all the problems soon but even so I still like the 522 alot-but have nothing to compare it to.. Someone else will have to chime in about the 721-it may have a more stable software and if you don't need the TV2 output than it may be a better choice.
If you decide on the 522 if you can get it you can probably get it activated
Some longtime customers have reported after emailing the ceo and complaining that they were issued 522's. I
think the email is
ceo@dishnetwork.com -edited to reflect correct email noted in next post
Anyway hope I didn't ramble on too long and made some sense