When the TARDIS lands during Full Circle, the scanner shows the wilderness of Outer Gallifrey rather than their real location (Alzarius in E-space). The Doctor implies that the scanner receives images from its known landing point rather than from any other means ('The image translator... reads the absolute values of the coordinates'), and is therefore genuinely showing Gallifrey as it would have been, had the TARDIS not been drawn into E-space.
This helps to explain many of the scanner's more unusual functions. In An Unearthly Child images of London appear on the scanner as the TARDIS dematerializes, and in The Reign of Terror the scanner is able to look at a point beyond the trees that surround the TARDIS. Both would be impossible if the scanner were no more than a standard optical camera.
The scanner can allow 'not very reliable' glimpses of future events (The Moonbase), and is almost certainly connected to the TARDIS' telepathic circuits (its images jerk violently when the travellers are attacked in The Web Planet). It can show pictures of desirable (false) locations (The Wheel in Space, The Mind Robber). In The Visitation the scanner shows an old print of London rather than a visually received image. Behind a roundel in The Wheel in Space is a device that allows the Doctor to project his thoughts on screen. In The Sensorites it is stated that the scanner's image can be affected by a magnetic field or an unsuppressed motor.
On other occasions the scanner seems to be little more than a video camera. In The Daleks' Masterplan, Logopolis and Enlightenment the camera is shown to be in the light on the top of the box (and in the latter story one can look into the TARDIS through it). The Doctor is repairing the scanner's audio function (seen in The Dalek Invasion of Earth, The Celestial Toymaker) in Arc of Infinity, and it's working again by Terminus. Terminus also shows that the scanner can be re-directed to the TARDIS interior. In Planet of the Daleks the scanner is shown displaying textual information.