The WDTV, as of the date of this writing (May 2012) has a tiny weakness when using Local Storage for BACKDROPS: One cannot specify an ABSOLUTE PATH to the backdrop file, it must be RELATIVE to the VIDEO file where the XML resides.
As such, one must be careful when specifying the options for Local Fan Art.
First, you must decide if you wish your Backdrops are to be in their OWN, HIDDEN FOLDER, separate from the video files.
This is done by CHECKING the option ".. in a hidden folder." If you select this option, the WDTV will expect the folder to be named ".XMLFetcherBackdrops", and you must create that folder yourself.
This does NOT change where this application will SAVE the files! *ALL* files will be saved to the Save-To location you specify. This option only affects how the <BACKDROP> tags will be written in the XML, which instructs the WDTV where to look for the backdrop files.
Second, you must specify how many folders HIGHER than the VIDEOs the Backdrop JPEGs (or the hidden folder, if selected) will be.
For example, if your VIDEOS are in this path:
\My Videos\Star Trek\Star Trek- The Next Generation\Season 1
... and your BACKDROPS are to be stored in the "MY VIDEOS" folder of that tree, then you would select "3" as the option here, as the MY VIDEOS folder is three folders UP from the SEASON 1 folder.
If you selected the "... in a hidden folder" option, then the WDTV will expect the .XMLFetcherBackdrops folder to be inside the MY VIDEOS folder. For example:
If you wish the backdrops to be in the SAME folder as the vidoes, then just select "0" for the folder depth.
If you are at all confused about these options, here's what you need to do:
Select 0 folders up from video.
DESELECT "In a hidden folder."