They wanted color in the graphic and it was cheaper to Photoshop a colored screen onto an iPod they already had than it was to go out and buy a new iPod.
I vaguely remember that someone from Apple ... relatively high up, like a VP ... actually clarified to the press, too, that the iPod Photo did not represent the 5th generation of the iPod.... Which is a kind of bizarre random thing to need clarification, but....
They wanted color in the graphic and it was cheaper to Photoshop a colored screen onto an iPod they already had than it was to go out and buy a new iPod.