Somebody else probably already figured this out but I haven't seen it posted so I thought I would share.
FYI - I have a Motorola Droid running Bugless Beast 1.1 (he's got 1.2 up now - http://g1.alldroid.org/~alldroid/sho...3-1-10)-STABLE ) . It includes the Live Wallpapers.
What you need:
Photo Gallery Live Wallpaper (free on the market - Photo Gallery Live Wallpaper v0.6 Application for Android | Themes )
Show Off app (free on the market - Show Off (Your Live Wallpaper) v1.0.0 Application for Android | Multimedia )
Screen On (free on the market - Screen On v1.7 Application for Android | Tools )
Keep Screen app - I use this one but I couldn't find it doing a quick search on androlib. Either one should work fine.
In live wallpapers set up the folder for the Photo Gallery and set it to be your current wallpaper.
Set the Show Off app as one of the apps it keeps alive in whichever app you are using to keep the screen on.
Run Show Off app.
Viola! You now have a digital photo frame.
I haven't done much testing as far as battery use but I ran my phone like this for my hour long commute this morning and when I got to work the battery was a nice cool 28 degrees Celcius so it wasn't being too heavily taxed for sure. It was plugged into the car charger the whole time so I will have to try it again later and see if there is a significant battery drain.