Hello again Spiros,
I also had to mess around a bit before I understood how it worked.. I read in your post above that you have installed the "TV/Composite" package, right?
Next step is to activate it. To do that you go to the "Utilities" menu and the choose the "Composite .kext" which you find in the bottom.
( I am not currently at home to see exactly how it looks, since i dont have my aTV with me.) When you click on it, you should see the frame around the word turning blue (takes a second) , and VOILA...there is colour.
There is a forum at atvflash that explains this, but it is not exactly correct since I think it shows the menues with different names. Its probably from an earlier version, but have a look, maybe it will help you anyway:
http://wiki.atvflash.com/index.php?title=Composite_Video
So, in short:
1. Install the composite software package ( you already done that, right)
2. Activate it in the Nitro TV "Utilities" menu.
3 Do NOT reboot..when you reboot it goes back to black /white again and you have to go to the "utilities" menu again and click on composite to activate it..
Good luck!! :-) Wish you a colourful new year!
/Peter