I didn't see how to do it at first (and figured I'd look harder later on in the process), and then when I saved it said I'd have to lose all transparency to save.  I kinda didn't bother looking and completely forgot after that.
I actually have no idea what it means, though I'd assume it means that white, or maybe a certain color of my choosing, acts as "clear".  If that's not it, I don't have another guess.
This is my first time ever making sprites though, so I don't really know techniques or terminology or anything, which I'm sure shows.  At some point in the recent past, several dungeonites sent me a few links on tips and stuff, but I hadn't gotten a chance to sit and read before this contest, and since I didn't want to miss out, I just did my best to wing it.  I tried to remember anything I'd learned from the art class I took when I was 10-ish, and then tried to recreate that in pixels.
Whether or not my entries are any good, I had fun making them, and I'm fairly pleased with them! :-)  If I need to do the transparency thing, I'd be glad to try and fix that too.  I don't wanna stall the contest, but I don't want to be a problem either.