The purpose of a scaler is to allow images to be viewed full screen on display devices with resolutions greater or smaller than the native resolution of the playback device.
The scaler converts the DVD native video size of either 480x720 (NTSC) or 567x720 (PAL) to the screens exact pixel resolution. In the absence of an additional, high quality scaler, the output of the DVD is scaled up or down to suit the display device - using scaling hardware built into the display. The task of achieving a seamless and artefact-free scaling requires millions of calculations per second - cheaper or older scalers built into display devices do less calculations and scaling can be compromised. Given that many projectors are available for around £1,000 and contain many expensive elements in addition to their scalers - it is unlikely that the scaling performed within will be of the highest quality achievable.
The purpose of an external scaler is to up or down scale the output from a playback device to be an exact pixel for pixel fit to the display device. When this signal is received - the display automatically does nothing and the quality of the displayed image is largely determined by the external scaler.
Some expensive scalers limit themselves to set resolutions (e.g. 720p, 1080p) - if the display device is, say, 1024 x 1024 the device will still perform scaling if there is a mismatch between this near miss and the actually required resolution.