Go up to the screen with the skeleton & stump just north of Volksville, then head east while wearing the necklace--you should get a message from the narrator about it vibrating. There will also be a musical change in the surrounding screens that let you know you're getting close. Once there, try manipulating the various prominent landscape elements on-screen. You'll stumble upon it sooner or later.
The peg game works like so: Click a piece to pick it up. When you do that, you'll notice that some of the empty holes on the board will highlight red. Click a highlighted empty hole to move the piece to that spot, or click the piece itself to put it back down. The object is to jump all pieces until only one remains. There IS a hidden solution to this in the game that allows you to bypass the peg game if you're having trouble solving it--you'll have to ask someone scholarly.
