It looks like the colon is wired between pins 7 and 8 of the display.
I don't understand how the digit function works either so I'll just have to keep at it.
The display is multiplexed. Only one digit is shown at a time. For a particular digit, first it sets up the segments:
for (byte i = 0; i < 7; i++)
digitalWrite (pins [i], pat [i] ^ adjust);
(7 segments are turned on or off as required).
Then it sinks the current through the "digit" pin:
// bring appropriate digit low to activate it
digitalWrite (pin, LOW ^ adjust);
So in effect it "sources" the segments and "sinks" the digit. It holds that for a few milliseconds (so you can see it) and then moves onto the next digit. To the eye it appears that they are all on at once.