Source: Palm Computing's developer site
Palm Computing's Web site (at http://www.palm.com/devzone/docs/palmos35.html) gives us our first clue.

It states that Palm OS software 3.5 will support 1, 2, 4, and 8 bit color and grayscale. 8-bit color allows pictures to have up to 256 colors, suitable for games, but not quite up to the task of displaying photos or video.

Source: Palm's letter to developers
The following is a letter from Palm Computing that was sent to developers. One such Palm developer, who asked to remain unnamed, sent this letter to us:

Dear Solution Provider:

Color is coming! By now you all should have heard about, or perhaps even seen, the newest release of the Palm OS that includes color support. In the spring of 2000, one of the hardware manufacturers that makes products based on the Palm OS will release a device with a color display! This licensee is interested in showing some of the stable, useful, quality, color applications that exist at the time of the product launch in its media campaign and possibly on its Web site. They also want to give you, the developers, enough time to prepare for this new product introduction.

In order to provide assistance and support to your development efforts, the licensee would like to invite all developers who have created color applications (that are stable on the color emulator!) to submit them for review. A number of applications will be selected and their developers will then be invited to a Color Device Developer Connection event on February 2nd. Please be advised that participants will be asked to sign a non-disclosure agreement before entering the event. Information regarding the agreement will be sent with the details of the event.

At this event, the licensee will have several color devices on hand for testing and viewing your applications. Moreover, we will have several Palm OS engineers available to interact with.

In order to submit your color application for review, send it to devrelations@palm.com as soon as possible (please ensure that your app is stable, useful, and of high quality).

We hope that you will create applications in all categories, from games to productivity enhancements to document readers to image viewers. Anything that uses color in an interesting way.