Most people who know me, know that I love watching movies. I've been trying to decide how I wanted to get a good movie watching experience in my relatively small house, and after a few back and forth conversations with an installer, I've decided what I'm going to do: a 1080p front projector with a 2.35:1 screen.
I thought I'd talk a little bit about why I made this decision, for others who may be considering putting in a front-screen projection system in their house for movie watching.
Content
The most important thing to think about when you're setting up a viewing area is what kind of content you'll be watching. Will you be watching primarily television or movies? If you're watching television, will you be watching primarily HDTV or standard definition?
If your answer is "primarily television", then your decision is probably much simpler: get an HDTV, or a front projector with a traditional widescreen screen. The vast majority of your content will either be 1.33:1 standard definition television or 1.78:1 widescreen television.
For me, the primary source of watching will be movies. I have so few movies that are 1.33:1 that it makes no difference, and even the television I have on DVD is mostly 1.78:1. However, if you look through your movie collection, you'll probably notice that a rather large percentage of those movies were actually shot in 2.35:1 (sometimes now listed as 2.4:1), or occasionally even wider. In my case, the number was almost 2/3rds of the movies being in 2.35:1.
Screen Sizes
Back in the bad old days of analog standard definition television, most of us probably had a very large, nearly square piece of glass in our living rooms. Standard definition television, with its 1.33:1 ratio, was set a long time ago when many movies were filmed in simple 35mm.
Fast forward a few decades, and movies were starting to get filmed in progressively wider and wider ratios, to offer a sense of grandeur to the viewer: an enveloping experience. Today, most movies are either filmed in 1.85:1 or 2.35:1. When these widescreen movies are shown on original scale televisions, they are either presented in "pan & scan" (part of the picture is cut off so it fits the screen ratio) or they are "letterboxed" (black bars are placed at the top and bottom of the picture).
When digital widescreen television was being developed, they chose a ratio (1.78:1) which was considered to be a "reasonable compromise" between the predominant television format of the day (1.33:1) and the predominant widest movie format of the day (2.35:1). These new HDTVs that we have excel at displaying HDTV, as well as those 1.85:1 movies. Wider movies get the familiar letterboxing, and SDTV gets bars along the side ("pillarboxing").
If you're going with a traditional HDTV, you really don't have any choice over screen ratio: you will be getting 1.78:1. If that's you, there's nothing more to decide upon. You're done.
If, however, you opt for a projection system, you hold a little more power in your hands. Some modern projectors, like the one I'm considering, offer zoom modes designed specifically for people who want to use extra-wide screens because the majority of their viewing material is extra-wide.
Consider a 2.35:1 screen. When watching any 1.85:1 or 1.33:1 material, you will end up pillarboxes on the right and left side, as illustrated here:

You get what's called a "constant height" picture: at 2.35:1, you're using the maximum value of the screen, and then progressive using less for smaller pictures.
You need some kind of special zoom system to help here, because the material on the Blu-ray disc is encoded at 1.78:1, with black bars along the top and the bottom. In this scenario, you are zooming the picture so the "dead" black bars from the picture are projected above and below the edges of the screen, and the 2.35:1 image fills the screen.
Compare this with a more traditional 1.85:1 screen arrangement:

The side bars for the 1.33:1 content are smaller, respective to the size of the screen, but if you keep the screens the same absolute height (as I did here for the purposes of illustration), you'll see that the picture size for 1.33:1 and 1.85:1 are unchanged. Only the 2.35:1 suffers, as it must be protected with its letterboxes intact. In fact, the picture size for 2.35:1 in the second example is only about 60% of the size of the picture in the first example.
In my room, the height of the screen is probably the hardest quantity to grow. My ceilings are only so high, but the wall I'm putting the screen on is significantly wider than it is high. It also seems like a no-brainer to set myself up for the maximum "wow" factor for the majority of my movies. And, really, choosing the 2.35:1 screen isn't a compromise at all when you consider how little flexibility I have with screen height anyway.
There are downsides to this plan. Obviously, you need some kind of zooming mechanism, whether it's a projector that uses physical zoom or some kind of an anamorphic lens system. Secondly, there are cases where those black bars above and below the picture might actually carry data (like in the case of subtitles for foreign films). Finally, there are those rare movies which are both 1.85:1 and 2.35:1 at different points in the film (recently, The Dark Knight used this to great effect in IMAX); in this case, you're probably stuck watching the whole film projected at 1.85:1 with letterboxing during the wider scenes.
If you're planning a home theater sometime in the near future, hopefully this information will be helpful!