Generally you should shoot to put the lens about 10% to 25% of the way back from the closest setting. This avoids the extremes of the lens range which is more likely to introduce lens aberrations compared to the middle of the zoom range and it also opens up the aperature allowing a bit more light to pass through and fall onto the screen.
I've kind of missed this thread, but you have some important things that really should be addressed:
1. Paint your room dark. Ceilings, walls, and add dark carpet if you can. If the room isn't dark, the image will never be ideal! $50 in paint is BY FAR the #1 improvement you can make in any theater. (use flat paint)
2. Get your lighting right! It should be a no brainer, but if you want lights on in the room, use directional lights at the back of the room away from the screen. If you can't wire for it now, then hit up Home Depot and Lowes and look for some alternative lighting solutions that allow you to turn the lights on without destroying the image on screen.
EXAMPLE LIGHTING:
AV Integrated - Custom Audio Visual Integration In Washington DC Metropolitan Area
3. A minimal gain screen is ideal for 95%+ of installations. I strongly recommend the Carada Criterion in Brilliant White material (1.4 gain) for almost everyone. The screen is built to a very high standard and provides an even viewing surface without hotspotting issues. Hotspotting is rarely an issue in any positive gain screens under 1.5 gain. Only the higher gain screens (2.0+) start to really develop hotspotting issues.
4. The proper product to do scaling is the one which does the best job. I strongly recommend that you use components that offer solid scaling like a Oppo Blu-ray Disc player if you intend to view a lot of DVDs. But, 99% of your content on the projector should be HD to begin with, and leaving that content in the native format all the way to the projector is typically the best way to go.
