I FINALLY figured out what the problem was! I'm posting what worked for me in case anyone else runs into this same problem.
I found out that my computer was sending out the signal to my vcr as composite instead of as S-video. My computer settings were set to auto detect the hook-up, but when I manually selected s-video the picture went from color to black and white, and when I manually selected composite it was back in color. So what I did was to manually select s-video again, and then turn off the computer, unhook the S cable from the back, turn off the vcr and unhook the s-cable from the back of that. Then reconnect the vcr, turn it on. And reset the vcr to accept S-video connections. Then hooked the PC back up with the S-cable and turned it on.
After that I was able to see AND record in color again!
Everytime there is a power outage my VCR switchs from s to composite so I have to switch it back, once I do that I am able to see the PC image in color again, but I guess what happened is the PC was not recognizing the s cable and switched itself over to composite, which was preventing me from recording in color.
So when this happens again I now know what to do.
Hope this helps if anyone else ever encounters this problem, which I hope they don't!^_^