I was able to get this working in the past on the old UI, but not the new one.
If you guys are using the old AppleTV UI (before iOS 5.1), I recommend downloading Cyberduck for Macs or Filezilla on Windows for transfer your files. It’s a hell of a lot easier than using terminal. You can connect to your AppleTV with SFTP:
server - AppleTV IP address
user - root
password - alpine
Once connected you can place your photos anywhere, but the default folder for the screensaver settings is /var/root/ so personally I just placed my folder with my screensaver in there. After that you need to apply permissions to those folders otherwise the screensaver settings won’t be able to access them. SSH into your AppleTV via terminal (or whatever on Windows) by typing:
ssh root@<AppleTV IP Address>
And the password is alpine.
Once connected type:
sudo chmod 777 -R /var/root
This will apply read/write permissions to all (so the AppleTV should be able to browse to that folder just fine with the custom screensaver settings)
From there you should be good to go. Unfortunately though I have found the custom screensaver settings is no longer available for the AppleTV 2 with the new UI (iOS 5.1). If anyone knows anything about how/when it will be coming back… please let us know!