PowerJake said:
Then, working from a nice graphic, how might the colors be made to fit in the palette? Mapping colors of the source sprite to colors in the current palette would involve some overhead, so I imagine the colors are simplified before adding the sprite to the game. Managing and enforcing 256 color palette sounds like a serious pain, maybe that is why the explosions look a little unpolished as the colors of the fire don't always look hand picked. I also imagine transparent pixels were removed, or maybe alpha channel would just be ignored by the renderer.

I am not a graphics artist, but I do spend time in retro games as a programmer.

You're starting with a wrong assumption I think. At the time “nice graphic” was a 256 color palette from what I know. Even today, if you look at how artists in retro games produce new graphics, they either use the 256 color palette of the game directly, or they use something 3D rendering and then convert the produced graphics into the palette colors. Palettes were typically ranges of shades in the same color, you have eg 5 reds, 5 greens, etc. I'd suggest you find some games from that era that are still being worked in the open source community, and see what artists are doing there.

Also, there was no alpha channel. Typically, one color of the palette functioned as “transparent” and was treated as a special case in the code (Color 0 often in my experience, as the CPU load instruction set the zero-flag, so you could immediately test and jump to the next pixel if it was color 0.)

As for number of yellows, I am not a graphics artist, but if I had to assign colors, I'd use more colors for the interesting stuff to the player in the game, and less colors for the stuff that happens rarely or quickly. Since an explosion is harmless information (players don't have to time to look closely at an explosion while other enemies are out there to get you), and exists for a few frames only, I can imagine other areas would be more interesting for getting more shades of colors.

Finally, 256 colors is less bad than it sounds. You do have the limitation of 256 different colors displayed at the same time at the screen, but nothing prevents you from changing the palette between scenes, screens, or levels. Other tricks were cycling colors. Imagine an orange flashing light. You can implement that by toggling the “orange light" color between black and orange once a second. No need to re-render the screen at all.

PowerJake said:
The first, and most mysterious question would be, where did these explosion sprites come from?

Perhaps created at one game and then re-cycled every time? Re-using graphics would seem like a cheap way to get content to me at least.