Secret level
Rumors about a Diablo III secret level began even before the game itself was announced, with fans frequently speculating about what sort of Secret Cow Level we might see next time. It's unknown if the D3 Team had anything in mind in the early days, but shortly after Diablo III's debut, the art controversy kicked up, resulted in various there are no rainbows in D3! jokes, and was picked up and run with by the design team themselves.
Color Controversy
Most fans thought Diablo III looked awesome right from the start. A minority of fans weren't so pleased though, and their objections soon crystallized around the idea that Diablo III was "too colorful." No one seemed to object to the monster and character graphics; it was the well-lit, blue/green-tinted dungeons that drew most of the criticism, and some of the too-pretty outdoor scenes. Some of which even had rainbows!
See the art controversy page for a full rundown of this issue.
Blizzcon T-shirts
The "too colorful" argument went on for some time, but had largely faded away by Blizzcon 2008, in October, four months after the game's debut. The D3 Team saw that the controversy wasn't entirely forgotten, by wearing custom made baby-blue Diablo III t-shirts featuring happy unicorns, clouds, rainbows, and more. One is seen in the the photo to the right.
Fans found these t-shirts hilarious, and instantly incorporated the artwork into hugely popular wallpapers, brilliant animations, fake screenshots, t-shirt sales, and much more.
Bashiok's Photoshoppery
The next instance of official support for rainbows and unicorns in Diablo III came in early 2009, when Bashiok got to joking with some fans in a forum thread, and quickly produced this photoshopped screenshot. It's a real image from Diablo III; a scene that's seen in the WWI gameplay movie; Bashiok just added the rainbow-farting unicorn and associated special effects.
Conclusions?
None of this joking means there will be any sort of secret level in Diablo III, and it certainly doesn't mean that there will be a secret level with rainbows and happy unicorns, etc. At this point the fans and designers are just having fun with this ridiculous concept, and amusing themselves by throwing the images and jokes back and forth. Whether they'll amount to anything that's actually in the game remains to be seen.
It's wise not to get your hopes up too high. That said, everyone thought the D2 team was just joking with their Secret Cow Level comments and April Fool's screenshots, and look how that turned out.
