A: This is no doubt a camera/cable issue and not software.
Some converters and lower cost cameras have this issue in the NTSC signal output. Going from S-video to composite is never a problem in my experience, but going from composite to S-video can be. S-video is higher quality NTSC analog signal than RCA/composite as you may already know if you have a DVD player and newer TV at home.
Most likely you are using an RCA/composite to S-video conversion in your cabeling
If you really need color, what you'll need to do is to obtain a composite input Bt878. Perhaps you can trade with another group or perhaps you card already has both composite and S-video in which case you should switch to composite.
Another option is to change your cabling - we have some cables that are supposed to passively filter and separate composite signal back into S-video. They are the cables that have the yellow ends, black cable, may 3 foot in length. The small inline converters typically don't work. Some cameras don't produce a signal good enough for the passive seperation to work also.
If you are using S-video you can also test this on a TV that has S-video input and I think you'll find you get grayscale there too.
Most projects really don't need color.