The quality of projectors as a function of their prices is just like that for other AV gears. When you go above a certain price point, the law of diminishing returns will certainly kick in. But unlike the BS/hype-filled world of "high-end" audio, I can assure you that up to the ~$20K range, you can always find a better projector when you pay a higher price. But the differences in image quality is by no means "night and day" or "jaw dropping" at first glance. Today's HT projectors, even the $1K-$2K models, are all darn good.
What I would suggest as the initial step in projector selection are:
(1) Most importantly, go out and watch a couple of reputable HT projectors (not data projectors) in action, in a dealer showroom or a friend's house, where they have a good ambient-light control.
Ambient light really kills the image quality, so the dealer doesn't have a good darkened room, don't even bother to stay. Decide how much you enjoy the FP as compared to plasmas or RPTVs. Don't forget to bring your own favorite DVDs with you -- for example, certain dark scenes in LOTR have been regarded as a good benchmark.
(2) If you feel that the FP is the way to go, determine, sooner than later, whether a DLP or LCD projector is for you.
DLP projectors are still superior than LCDs in the absolute contrast ratio, quality of blacks, and shadow details, although LCDs are steadily improving in these aspects, too. Also, DLP pixels have higher "fill-ratios," resulting in smoother, even more film-like images (some LCD projectors suffer from the "screendoor" and/or "fixed patter noise" artifacts, although they are mostly a non-issue in the latest 720p-class machines). In return, some people see the nasty "rainbow artifacts" or color-breaking when watching high-contrast scenes on DLP projectors. Many people don't see them at all (unfortunately, I do). Also, some people are bothered by "dithering artifacts" seen in shadow parts of DLP images.
Once you decide on the DLP versus LCD issue, the choice is pretty straight forward for a given price range.
