Palm (PALM) began notifying registered m130 owners beginning late Wednesday afternoon that they were entitled to a full refund, including taxes paid on the PDA. Those owners who choose to forfeit the refund and keep the PDA could instead download a free version of the video game SimCity, which normally sells for $29.95, Palm said.

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Palm's action represents a change of strategy for the company, which previously said it would not make any refunds for its error.

Two weeks ago, Palm admitted that its m130 handheld couldn't display the 65,536 colors the company had been advertising since the product came out in March. By using blending techniques, the company can display 58,621 "color combinations -- approximately 11 percent fewer color combinations than we had originally believed" on the m130, said Palm spokeswoman Marlene Somsak.

Somsak called the error an "honest mistake" and said the company was not aware of it until Wired News made an inquiry.

Palm issued an apology on its website. While it mulled over ways to compensate m130 owners, the company ruled out a refund at the time it discovered its error.

Its most recent decision also follows a class-action lawsuit filed last week in California's Superior Court in Santa Clara County.

Jonathan Shub, an attorney from the Sheller, Ludwig & Badey law firm, which filed the suit, said the firm would continue to pursue its case against Palm, although he considered Palm's decision to offer refunds "a positive development."

"We are closely monitoring the process by which these actions are being taken," Shub said.

While Palm has not formally replied to the lawsuit, it promised to fight it.