Mac OS 8.1 gave you the option of using the external sound-in jack by selecting the "Sound In" option in the Control Strip or the Monitors & Sound control panel. However, the sound would play through to the speakers by default which could cause feedback when the external sound source was a microphone.
Mac OS 8.5 and later, addresses that issue by offering an "External Microphone" source which uses the same sound-in jack, but turns speaker playthrough off by default.