Hi spicy_fajita,
Welcome to the forum
Not sure if I can answer all of your questions, but this'll be a start anyway:
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1. Getting screen later and was thinking initially to buy an AO sheet of paper/card or use a painted wall. Is this ok for a while or should I invest in a screen initially. Also, what screen works well with the PTAE100.
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Not sured of dimensions of AO sheet, but would prob advise against paper - too difficult to maintain aflat surface, and of ythere was a sheen of the paper, you'd get a pooor result - hot-spotting and bloom - an uneven brightness across the sheet. If you're waiting ona screen and you're reasonably handy, you could put toegther a homemade job for about £20 - search here for details and links. Alternative is to go for a wide matt white roller blind as a stop-gap. A painted wall should be ok, but go for matt white paint for a start off.
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2. What sort of lighting can you watch a movie comfortably in. At the demo I was impressed that it was not pitch black in the room but I may have just been blown away by the big picture. In a cream coloured room, how dark on the lights do you have to go.
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I don't have any ambient lighfor movie watching - it doesn't help picture quality at all. You'll get away with the likes of a table lamp with 40W bulb, but try to ensure that no light goes directly on the screen surface - its a complete killer. Think of it this way - black in your movie is the absence of light from the PJ (disregarding previous discussions of light spill from aperature in LCDs). If you have a cream coloured room, with a couple of table lamps on - comfortable TV viewing light levels, then your screen will be pretty well lit by the ambient light - making your picture quality fairly cack. Its the kind of thing that you'd notice about five minutes after you got over the "big picture" thrill. Also, with an all cream room, a good degree of light from the PJ will be reflected from the walls back on to the screen - not ideal, but then fitting front projectioninto a living room environment is a matter of compromises.
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3. What sort of image size can I expect that will give an acceptable picture quality.
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The AE100 maxes out at about 8' wide screen imho. At this stage screendoor is a problem, dependoing on seating distance - you'd nee to be a good 12 - 16' away from the screen. In a normal sized living room (12x12) I'd try for 6 - 6.5', sitting 10 feet away - matter of choice really.
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4. Seems to be that progressive scan and component video are the way to go so I'm going to buy a new DVD player as well. Does progressive scan only work on some DVDs or are there players which will ouput it with R2 DVDs. Can anyone suggest a cheapish DVD player that will do this.
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Sorry about this - I ain't the DVD player guy !! - Prog scan comes in 2 flavours - PAL Prog which is fairly rare and on which you can play R2 discs and NTSC Prog which will only give prog scan with NTSC (R1) discs. Check out the DVD Player part of the forum - some surfing/searching there will get you started.
All the best,
Sean G.
EDIT: Sorry about typing errors - in a hurry !!

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