Basically the direct vent type appliance (water heater, furnace, fireplace, etc.) has an exhaust gases discharge pipe and a fresh air intake pipe installed in two configurations.
As a single assembly with double walls where the center section acts as an exhaust vent and a space between the two, inner and outer, pipes direct the combustion fresh air supply straight to the burner chamber.
Two pipe assemblies operate the same way, they just have a separate intake and exhaust pipe.
Since the combustion chamber is completely sealed, isolated from the interior of the house, a direct vent appliance (e.g. water heater) can be installed in areas where an appliance utilizing interior air for combustion cannot.
Let me know if you have more questions.