I have been going through a similar thought process as Chris over the past couple of years, so I thought I would go through his questions and apply my (so called) reasoning process to them to see if my suggestions help him reach a decision.
Chris asked, "If I did purchase a Blu-ray disc player, would the images look any better on the Sanyo versus an upscaling player like the Denon 2910? I know the sound would improve but what about the image?"
If I understand your question correctly, you are asking if a 1080p source (HDDVD or BD) scaled down to 720P will look better than a 480p source (DVD) scaled up to 720p? I have never seen a direct comparison, but for a nice explanation on why the higher quality source will give a better picture than just upscaling the 480p source, read this article from projectorcentral.com (
http://www.projectorcentral.com/hd-dvd.htm). The short answer is that the 1080p source scaled down will look better than the 480p source scaled up.
That being said, in your particular case, I don't recommend you buy either a new high def video player (HDDVD or BD) or a new upscaling DVD player (the Denon). Why? Because you (like me) don't seem to be a "bleeding edge" consumer and cost really is an object to you. You have been content for the past few years to watch your non-progressive scan, non-HD TV. It doesn't seem to me to be the right time to buy a high-def player - they are still working out the bugs and fighting a format war that you don't want to get involved in. Now is also the wrong time to spend $700 on a new DVD player (assuming you currently own a decent progressive scan player - your note doesn't mention it). Why spend money on a DVD player when you feel strongly that you will eventually want a high-def player? The high def players will be able to up-scale your standard DVDs just like the Denon 2910, and in addition will be able to play high-def sources. And depending on the player you choose, they may cost less than the Denon 2910. You may be worrying that you won't get the "ultimate" in AV. Believe me, the difference you will notice between what you are doing now and what you will see on a 110" progressive scan presentation through a good 720p projector will be huge! From a stewardship of money point of view, you are always wiser to buy one step behind the "bleeding edge". Look at the cost of really excellent 720p projectors. Just a bit over a year ago, the Optoma H79 was $10K, and considered one of the best 720p projectors. Now, in a head to head against the Sanyo Z4, it comes out to about a tie. The difference is the Z4 can be had for $1500 and you can get a free screen and replacement lamp with it! Comparable quality for 1/10th the cost makes staying behind the bleeding edge seem a reasonable option for those of us without unlimited cash.
Now to formally address your questions.
1. As mentioned above, the HD source will give a better image quality than the upscaled 480p source. But I don't recommend you spend money on either right now.
2. Screen recommendations for the Z4 or the Panasonic AE900U (it won the Audioholics 2005 product of the year award and you can sit closer to it for the "real cinema feel" because the AE900 has less visible pixelation than the Z4). I recommend the Da-Lite Model B or C in high-contrast matte white (can usually be found for $250-400). The reviews I have read have not recommended going above 100 to 110" diagonal for screen size due to the lumen output of the projectors. Remember, if you want the image to look bigger, just sit closer.
3. I think now is a great time to buy a 720p projector. Why? Because you can get what you are looking for - great looking DVDs and HDTV images on a huge screen - and you can get it for a little less than half of your suggested budget! I know you said you don't want to upgrade in a short time, but I still recommend that you buy the less expensive, better established technology now. This puts you in a great position to let the high-def format war work itself out and at the same time let the cost of 1080p projectors come down. The great part is that while you wait, you still get a home theater experience that visually outperforms most local theaters. Who knows, 3-5 years down the road you may have saved your pennies and be able to upgrade to a "pure 1080p" system for about the same amount you are spending today.
