The HTPC usually plays back DVDs doing all scaling in the digital domain, preferably at 48 or 72Hz to avoid 3:2 pull-down judder, and at at an ideal resolution where "ideal resolution" is defined as native resolution for digital projectors and a nice (2X, 1.5X, etc) multiple of DVD resolution that has the scan lines just touching on CRT projectors (I run mine at [email protected]).
It usually scales external analog inputs to the same resolution. It may use a SDI Silk SDI (an uncompressed professional digital video format) input board in conjunction with DVD players and/or satellite receivers that have been modified to have SDI outputs.
It may act as a disk-based HDTV recorder, although doing this with satellite is difficult.
It probably has IR control so you can use it like any other component.
It may have lots of disk space, so DVDs and CDs can be ripped and played off local storage.
If not located remotely, something will be done to keep things quiet - passive cooling for the graphics board, low-noise fans, etc.
Ideally, it's dedicated to the home theater so you don't have anything that can act up and cause dropped frames during DVD/audio playback.
Good hardware choices are the ATI Radeon graphics boards (because they do the best scaling (bicubic interpolation) and have hardware inverse DCT to accelerate MPEG playback) and M-Audio delta series of audio cards (high quality S/PDIF output, no resampling from 44.1KHz for audio, and 96/24 from the analog outputs). The video input board must be Bt848 based in order to work with dscaler.
Software will include dscaler, PowerDVD/WinDVD/Theatertek, probably girder for IR control, power strip to do custom resolutions, WinAmp, etc.