@vazandrew - Thanks for outlining the technical restrictions, but you're not really offering a solution to the problem.
This thread isn't about viewing your photo library (which is easily done via the photos option, as you point out); the poster is asking about increasing the number of photos that the screensaver uses, and there is no good solution to that short of a firmware update that changes the screensaver's functionality.
Note that the limited variety of photos in the screensaver is a problem for what seems to be a heck of a lot of people (most Apple TV users I know have mentioned this as an issue - not a statistically valid sample, I know). It's not a show stopper, but it's disappointing. What's more disappointing is that fixing the problem is conceptually simple (unless someone else already owns the patent to the various obvious solutions).
Streaming would be easy (the code used for the menu option already does it). Just check whether you can reach the host, and if yes, use the streaming code. If not, pull photos from the cache. For that matter, just refresh the cache more regularly (e.g. every 10 minutes?) than is currently the case (when you select your photo set for the screen saver) and Apple will have happier clients. 🙂