the Mac OS, from version 10.0 onwards is a completely different beast to all previous versions. 9.2 was the last version of what is now referred to as the classic os. while most software was ported over to work with the new Mac OS X, a lot of games never were, old DOS-era games like Monkey Island being among them.
to get past this, Apple created the Classic environment within Mac OS X, so that you can run old software within the new OS. This needs an existing install of Mac OS 9 to run, which you appear to be lacking. you can install this from your original install disks (the grey disks that came with the iBook when new), or you can install any copy of Mac OS 9, which can be found on eBay for next to nothing these days.
Dual 1.8GHz G5 2GB, 1TB, Radeon 9600XT 128MB, 10.5
20" Apple Cinema Display + Dell 2005FPW 20" dual-head
iBook G3 700MHz 640MB, 40GB, Rage128 16MB, 10.4, dying battery