Thanks Carlow for the suggestions. I tried changing the color mode to no avail.
This really is the strangest problem. If anyone's got a minute, give it a try yourself. Type a word, select "object", "envelope distort" and "make with warp". Choose any warp. As soon as you hit ok, and the warp takes effect, you can no longer use the color pallete. It seems to be a bug. If anyone has solved this problem, please let me know.