I would really like to do this also. The Vista photos screen saver will play full length videos. Windows Live will only play the first 10 seconds. I use the Vista saver all the time on my family room HTPC. The kids love seeing the pictures and videos of themselves. I would like to upgrade that PC to Windows 7, but I can't because I will loose the good screen saver.
I have tried copying over all the files from "C:\Program Files\Windows Photo Gallery" and the "PhotoScreensaver.scr", and the registry settings, but it does not work. I just get a black screen.