Indexed palette is definitely what I want to include.  As far as B*W/1bit, I'm actually a big nerd/fan for black and white displays.  They silently put a focus on making things rather than deciding how they should look...because let's face it, if you're not busy deciding what color to make your car, then you should be already making your car!  Since I'm looking at the Amiga 500 and Atari ST as main inspirations on how to make the project 'appear', I've been kicking around the idea similar to what you mentioned, but with both included: namely a high resolution b&w mode and low resolution indexed palette/color mode.  That way, if nothing else, the high resolution B&W might be considered a way to get more screen realestate for etoys scripting that gets complicated or for people who are just discovering the smalltalk/squeak underneath while the lower, color resolution would be ideal for 'presenting projects'.  

It's still undecided at this point, but is also going to heavily depend on how fast/much I can learn smalltalk as I go.  I'm not a programmer in the way many of you are, I'm more of an artist hacker, and thus my abilities to bring such things to life is limited by this!  

Thanks for checking it out!