The various grayscale signal patterns cause different sorts of chroma channel "leakage", leading to the below colors. (The X axis is the least significant nibble in this shot.) This shot was taken on an old LCD monitor (Samsung 150MP), hooked up to the composite input. The actual colors were more vibrant/unique than they appear in this photo.
It's a pretty sweet mode, and what's amazing to me is that all the programmers from the late 80's who worked on this platform mostly ignored it (probably because it didn't work on RGB monitors). Some pretty sweet things could have been done with it because 1 pixel per byte is quite convenient and it didn't need any funky tricks like frame flipping, or mucking with video palette registers in a interrupt handler. I still remember seeing some 256-color images of some photos in the late 80's for the first time (at a Radio Shack store on a Tandy 1000), and being utterly amazed at the detail.
Apparently Tandy engineers were planning on including a real (not artifacted) 256 color mode in the updated CoCo 3, but the execs didn't want their little CoCo line to compete against their big Tandy 1000's. So in a ridiculously shortsighted decision they nixed the idea. However, there were rumors that this mode was actually implemented in the CoCo3's "GIME" graphics chip anyway but just not documented. The fascinating history and technical details can be read about here. Through some sleuthing the author even tracked down and interviewed the hardware engineer who created the CoCo 3's GIME chip, John Prickett.