Answer:
1) Peter & Santa Claus requires a resolution of at least 640x480 pixels.
An Apple 12 inch RGB display does not support this resolution. This
may be why you are receiving this alert. You must use a 13 or 14 inch
RGB display or larger. If you are using a large enough monitor,
perhaps you are running in something other than 256 colors.
2) Peter & Santa Claus requires 256 colors to run. You can set your
Macintosh to run under 256 colors by going to the Monitors Control
Panel and selecting 256 colors. If you do not have 256 colors
available to you, you need to buy more VRAM, or a video board that
supports 256 colors.
Reference: Peter & Santa Claus Configuration Requirements