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Videoprocessors/scalers have 5 main purposes. 
They can input ALL your sources and switch accordingly, whether older legacy analogue outputs, like component and s video, or newer sources like HDMI ,HD SDI or DVI and output via one hdmi lead, for example having upscaled lower resolution standard definition sources to 1080p and passed through higher definition sources to also output as 1080p.
A lot of the more modern Video projectors have some form of video processing from names like Silicon Optix, Gennum, Faroudja etc..
In the main, these are bare bones video processing implementations, oft using a cheaper processing variant..Reon as opposed to Realta for example.
There are a few very high end projectors that feature the latest processing options, but even these don't have the flexibility of the entertainment hub of a standalone Video processor.
Within the better Video processors, one can adjust all aspects of a display's picture to a more sophisticated conclusion, using the processor's colour, contrast, brightness, gamma and detail controls with, in most cases, use of extremely accurate reference setup patterns.
This can make setup of projectors extremely easy as projector picture controls can be mid-pointed or set at default ,as the case maybe.
Let's imagine you have a 1366 x 768 native display resolution, but none of your source kit can output in this resolution, you just take all your inputs into the scaler and output at 1366 x 768 to match the projectors native resolution, pixel for pixel.
This results in no unecessary artifacts created from downscaling a 1920 x 1080 signal to 1366 x 768 within the projector..assuming that the lesser resolution display can even accept the higher resolution in the first place..some can't!
In most cases, all aspects of output resolution can be fine tuned, whether it be timing or frequency, this is especially useful when integrating newer digital sources with older legacy analogue displays like CRT.
In some instances inputed digital signals can also be transcoded to output in analogue.
We all love to watch the movies as the director intended, and since the 1950s, most major movies have been Cinemascope format of 2.35.1 to 2.41.1.
This means that if you have a older 16.9 projector without a 2.35.1 aspect mode you need a Video processor WITH a 2.35.1 mode to enable you, in conjunction with an anamorphic lens and 2.35.1 screen, to achieve a true 2.35.1 setup.
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