iBook Processor on Reduced?

Look at your screen shot. The Optimization Menu at the top says Custom. That means you have changed either one of the sleep sliders, or the Processor Performance. If you change the Optimization to Better Performance then it Processor Performance will be set to Highest or you can change it yourself for the custom option.

Also, When you switch from battery to power supply, the setting will automatically change to what is last set on when it was using that power. For Example: Say I was using battery power and had the Optimization menu set to Better Energy Settings. Then I plugged in the power adapter and set the Optimization to Better Performance. When I unplugged the power adapter the computer would automatically switch back the setting I had for Battery: Better Energy Settings.

 

I do believe you've found a bug.

If you switch the Optimization to any setting other than Custom, it changes the label. i.e. if you switch to Better Performance, it sets it to 'Your energy settings are optimized for high performance.'

If you then change any of the settings, it flips Optimization to custom, but never updates the label. So you can set your CPU to low speed, make the hard drive sleep instantly, etc., and that label will still insist you have HIGH PERFORMANCE!

Maybe this is related to Apple's insistence that their processors are the FASTEST ON EARTH! *duck*