While I know you've declared PATH, I'd be more comfortable with:
/usr/local/bin/photo -s d /mnt/flash1 &
Saying that, I think the sleep might help, but slightly reordered.
Maybe if you rename .flashrc.local to myphoto (and put this on the flash card also), you could change your .flashrc.local to something like
So it will call your myphoto, but not wait for it to respond (so the Roku can continue booting)
Then the first line of myphoto could have the sleep (as you currently have it) and hopefully the photo app would start when the machine is fully booted (if that makes sense).