Presumably because you do not have the file grass.dmi or possibly Water.dmi

make sure they are spelt exactly the same, so it might be Water .dmi instead of Water.dmi notice the space in the first example. Little things like that matter.

and check this out now
mob
Login()
world << "Hello And Welocme to Avatar Chronicles!"
mob
verb
smile()
world << "[usr] grins."
giggle()
world << "[usr] giggles."
emote(msg as text)
world << "[usr] is, [msg]"
mob
verb
say(msg as text)
world << "[usr] says, [msg]"
turf
grass
icon='grass.dmi'
icon_state="grass"
turf
water
icon='Water.dmi'
icon_state="water"
density=1

its sayign messed up indention.... were?!?!!?
dude this programmng stuff is mad hard.... anyways soemoen helpz meh out

for indentation errors i always use shift+tab move everything to the left and re-indent.

i dont think icon states matter in compilation as it defaults to "" (blank) if it cant find the one specified so my best guess is that these files are not saved in the same directory as the rest of your project.

"Inconsistent indentation" means that you are using a different amount of indentation in different places. In your example, you are using four spaces under turf but only three elsewhere. That wouldn't give you a compiler error, but some other mistakes would (like having a "world<<" line not be inside any procedure).

Of course, pasting code to the forum messes with tab characters, so if you're mixing spaces and tabs we can't actually see that mistake. Press control-T in Dream Maker to show the tab characters, and it should be clear where there are inconsistencies.

The files need to be in the same folder as your .dme file. Or, a subfolder of that folder. Being on your desktop will not work.