Hi Bushido,
If you do decide to go down the projector route, I'd seriously consider getting a demo of the In76P by Infocus, which is hd ready up to 1080i. It's comfortably under your budget which will leave you some spare for a decent screen and cabling etc....
I only use mine for 360 and dvd at the moment and imho the pq is fantastic. The "rainbow effect" is an issue as some people are apparently more susceptible than others, and I have noticed it a few times during film but never whilst playing games, dunno if there is a reason for this but it has been very infrequent in my experience so far.
I'm sure you will have many suggestions, as mentioned above, but so far I'm more than satisfied with my lot.
Hope it helps.
Toko.
forgot to mention that there is a certain "wow factor" involved when showing off to friends for the first time. But I'm sure we're all far to mature here to let that be an influence!