Well, that estimate is down from the pre-iPad release estimates of 4.03 million.
(At the time, they estimated iPad sales at 1.6 million.)
http://ireaderreview.com/2010/01/24/...via-digitimes/
Still, 3.5 million is plenty good. And iPad cannibalization looks to be minimal (<14%)
BTW, that article has otherwise been right on the money; they predicted 3G readers hitting $199 and WiFi readers hitting $149 back in January.