What were the rules of this challenge?

Wow your little edit is awesome :) i agree that they should have a diff pose.

i think this could still use a lot of work, maybe add a ying yang sign on the arenas floor, it would rly match the scene, the sky looks too flat, a gradient would help, the arena seems to be floating instead of lying on the mountains top, like, i guess, its supposed to be. also i think  the scene lacks of action, maybe you should try some more dynamic poses for the sprites. for the colors, they look unnatural, these are way too bright, especially the HUD,  also i think could use much less, 32 seems a bit over the top for this piece, think 8 would do it also, maybe better...

heres a very quick edit, hope i can give u some inspiration....i used 8 colors only

http://i992.photobucket.com/albums/af45/oooonek/battlescene.gif