The Front Projector.
This is the single most expensive piece of gear for the home theater. For me there was no question: I want to use only a front projector (like in cinema) First of all, the overall result from a front projector (LCD or DLP) is much, much better than any rear projection TV's. Yes, it is looks expensive but it is definitely worth the money (and in fact it is cheaper inch-wise). If there is a stereo store near you which shows some home theater quality projectors in action (and I mean in a real home theater room with dimmed lights) then go and see it and you will be surprised how cinema-like it may look. You will never look at the heavy overpriced rear projection TV's again. With front projector you can have easily 100 inch screen and that looks magnificent.

So the real question is what type of front Projector I need.

There are some quality and non expensive LCD projectors build for home theaters (with improved contrast and screendoor effects) for example Panasonic AE100 or PT-L300U

The first DLP generation used slower rotation of color wheel which could create some color ringing or rainbow effect in fast scenes. (Have you ever look into a color scanner during scanning? The white light can sometimes produce this rainbow effect) You can read a lot about this on various web boards (mostly from LCD evangelists). However this has been fixed in next generation commercial DLP which used 2x faster rotation of the wheel. These days many new projectors use 4x or faster rotation of the color wheel which makes this problem non-existent.

A great non-expensive DLP projectors are made by Plus: Piano and also their new HE-3200 Avanti. If you have limited budget then a sub $1000 DLP projector InFocus X1 is a great performer.

16:9 resolution
One of the most important feature for watching movies is the native 16:9 resolution of the projector. That means the projector has the LCD or DLP chip made with 16:9 ratio, not 4:3 as for presentations. On a presentation monitor a 16:9 movie will be fit into the 4:3 as in letterbox and you will have a black bars on top and bottom. This would be fine if they are really black, but with LCD projectors they are in fact gray and it is quite disturbing (1) You can get rid of it by masking a part of the screen with black curtain or board but this may not fit well into your room design.
The true 16:9 projectors simply have no bars, the 16:9 is a native resolution and if you ever watch 4:3 movie it will be displayed as a rectangle in the middle with bars on left and right. (2) So all you need is a 16:9 screen because it never display anything outside 16:9 area.
Some DLP projectors (Piano) have something called dual resolution (3). It is a rectangle created combination of booth 4:3 and 16:9. It is wide to fit 16:9 but also tall to fit 4:3 With DLP this can be done simply because the thinner bars on top and bottom during 16:9 films and the left and right bar during 4:3 are almost non visible because of the greater black contrast. For users with 16:9 screens the dual chip can be also switched to display the 4:3 image smaller, similar to (2)

Resolution: For a DVD quality you need 720/480. Some projectors accept only 720/480i (interlaced, it can be used with any DVD player) and some also 720/480p (progressive, it can be used with Progressive DVD player).

If you are planning to use the projector for High Definition TV programs then you would want to go for projector capable to work with this type of signal. But don't get confused reading specs: unless the LCD/DLP chip has a true High definition resolution (only more expensive have) this will not bring you better quality, it is just more convenient

Since the projectors unlike TV is a native progressive device, any input interlaced signal has to be converted to progressive inside the projector. A salesman would tell you that it is better to use progressive DVD player and progressive input in projector, but in real life this may not be true.

Here is a secret the salesman doesn't even know:

Because films on DVD are stored in 24 progressive frames per second an then to keep it with the 30 fps of NTSC the normal DVD player has to apply so called 3:2 pulldown. This splits every 24fps frame into two interlaced fields (48 half frames per sec) and then add additional field for every other frame. (which adds 12 half-frames per second which gives the needed 60 half-frames or 30 full frames per second) So the result is: two fileds of one film-frame then three fields of second film-frame, then again two fields of third film-frame etc...
Obviously because of the new 3-2-3-2-3 fields the TV display some frames where even lines are from film-frame A but odd lines already from film-frame B as in the image on left marked by (2). On fast scenes or cuts (1) this may create jagginess.
That's still considered a normal knowledge even between salesmans.

Now yo would say, since a DVD film is already progressive, the progressive DVD player can just read these frames as they are without interlacing and then convert them to 29.97 fps. But, here is the secret: The progressive players don't do this. They do all the stuff with interlacing as the normal players above. What you pay your big bucks is the video processor which takes these now interlaced frames and create progressive output by again deinterlacing them. Funny, isn't it?

But with the deinterlacing you are not simply merging every two half-frames (img 2) as on TV (this will create the same jaginnes on certain frames) but you use various interpolating and scene detection techniques to determine which half frames to merge, which ignore and which to duplicate. Now obviously not every deinterlacers are build with the same logic and processing, there are bad ones, average and a good ones.

And this is the whole story. Since the home theater projectors doesn't display the picture in interlaced way, they have build-in deinterlacers. Because the bad interpolating and jaginnes would be quite visible on big screen, often they have very good deinterlacers. For example Plus Piano uses Silicon Image, which is the butter in this class.

The bottom line: The progressive DVD players do the "progressive" trick by deinterlacing the signal not by directly using progressive data from DVD. However unless you have first class (read expensive) progressive DVD player the deinterlacer in a good home theater projector (Piano) may does a better job as many of normal progressive players. Even the argument that the deinterlacing in projector is from analog signal while deinterlacing in DVD is from digital doesn't seems to affect this reality.

For my cinema I got Plus Piano and I am always surprised how good the picture is even on a difficult movies. And it is also very quiet projector.