I'm currently powering the whole custom board (with ATMega328) through a 7805 regulator, which I think is where most of the sleep current is going. There is an LCD screen which remains on all the time, but that won't be taking much.
My application is an "intervalometer" for triggering a camera at regular intervals for time-lapse photography. Once the time interval has been set up and a run triggered, I will put the cpu to sleep for a second, then wake up, count down by one second, trigger the camera if the countdown reaches zero, and update the LCD with the remaining countdown time and total number of images taken. The sleep duration will be calibrated so one loop lasts as near one second as possible, but it doesn't need to be totally precise.
I think if I replace the 7805 with 3 AA batteries the current consumption while it's running should be pretty low.