A few useful links on skt-utf, an Omega TeX package that allows you to input and process Sanskrit inside LaTeX.

The skt-utf package resides at the site of the Martin-Luther-Universität Halle- Wittenberg Philosophische Fakultät Fachbereich Kunst-, Orient- und Altertumswissenschaften Institut für Indologie und Südasienwissenschaften, on a set of pages maintained by J Hanneder.

A more straightforward set of instructions for installing and using the utf-skt package can be found on the page Sanskrit Unicode Text Processing by Christian Coseru of the Australian National University. This page also covers the installation and usage of the corresponding Emacs packages.

My installation was pretty simple (I run Slackware 9.0 with Dropline Gnome)

get root privileges, then extract the package

ludo:~# tar zxvf utf-skt.tgz

find the location of your texmf-local tree

ludo:~# kpsewhich -expand-var \$TEXMFLOCAL
/usr/share/texmf-local

if the directory does not exist yet, create it

ludo:~# mkdir /usr/share/texmf-local

copy the contents of the extracted archive's texmf directory under your texmf-local tree

ludo:~# cp -R utf-skt/texmf/* /usr/share/texmf-local/

update the TeX files index

ludo:~# /usr/share/texmf/bin/texhash

The installation is now complete, let's revert back to a normal system user to test the package, using the example documents contained in the utf-skt/user/examples directory extracted from the archive.

Before starting, it will be useful to note that utf-skt is an Omega package (Omega is a TeX extension "designed for the typesetting of all the world's languages"), and so the commands used to generate .dvi files from the .tex sources are different from standard LaTeX. Instead of latex we will need to use lambda, instead of dvips odvips.

Let's create a PDF file from the Transliterated.tex example file (I only list the commands, without their output):

ludo:~/download/skt/utf-skt/user/examples$ lambda Transliterated.tex
ludo:~/download/skt/utf-skt/user/examples$ lambda Transliterated.tex
ludo:~/download/skt/utf-skt/user/examples$ odvips Transliterated.dvi
ludo:~/download/skt/utf-skt/user/examples$ ps2pdf Transliterated.ps

Supposing you got no errors (due to problems with your TeX or utf-skt installations), you should now have a Transliterated.pdf file. If you open the file in Acrobat Reader though, you will notice that the fonts are all blurred. The PDF will print ok, but reading it on-screen is a pain. This is due to dvips including bitmap versions of the fonts used in the document, instead of their outlines.

After a bit of digging around in Google, and experimenting with different solutions to this problem, I found a thread in the debian-users list that worked (keep in mind I'm a novice TeX user, so other solutions may be better for different setups, etc.):

In your home directory, make (or modify it if it already exists) a file 
named .dvipsrc which must contain the lines: 
    p+ psfonts.cmz
    p+ psfonts.amz
 Make sure that the LaTeX preamble of your LyX file (or the part before 
\begin{document} if you are using straight LaTeX files) contains: 
    \usepackage[T1]{fontenc}
    \usepackage{ae,aecompl}

Re-running odvips and ps2pdf the resulting PDF looks as in the image above. The document source in the image is opened in Gnome 2.4's gedit.