Quoted from chadderack:I'm guessing they have to pull each of the slides out of the original display ROM... which are encoded as 2 bit grayscale (4 possible values between 2 bits). Then one by one the frames get colored in an image editing suite (likely Photoshop)... and probably encoded back as a limited palette color image (like a GIF) and stored on an extra chip in the Color DMD. I'm guessing the MPU sends requests to the same hardware addresses as would happen with the regular display board but the Color DMD instead of serving up the grayscale image it serves up the new image.
There's no "easy button" to click and colorize each frame, one would guess. There are some good tools for DMD editing, though... one of them is called DMDPaint (Google should find it for you). (Unsure if DMD paint handles full color though).
Uggh, I was JUST about to say that...