Color Comes to E Ink Screens - NY Times article.
It is made out of regular eInk technology but with a colour filter on top. This means it won't have vibrant colours and it has the usual limitations with refresh that eInk already has. It will do the flash to black reset as well between pages. The sharpness of the screen will be affected as well by the fact there is an extra filter.
If/when Amazon deem it to be viable then there will be a colour Kindle but not until then. To stop the inevitable fear and raging, your brand new Kindle 3 or Sony PRS isn't obsolete or useless but I'm sure people will still complain even though Sony and Amazon haven't announced anything and won't until next year at the earliest due to the PRS and Kindle 3 just being released.
If you really want a colour eInk reader then you'll have to wait for this Hanvon reader to be released and then somehow find somebody you can order it from in China.