The two big differences are the color screen which looks much nicer and allows the display of album art in two different views and the storage and display of photos.

iPod photo can store photos on the iPod and display them both on the screen as well as on a TV/Monitor through a special cable it ships with. With the cable, you can present photos with music which is a very nice feature.

Update 6/28/2005: Apple has merged the two products into one so there is only the "iPod" and no longer an "iPod Photo". Everything is color now.