So you're here to learn how to create the "fuzzy edges" around a sprite, eh? Easy! Here's the 11 steps:

1) Select your sprite.
2) Duplicate your sprite (Crtl + D).
3) Blur your sprite at H:10 & V:10.
4) Duplicate this blurred sprite.
5) Move one away, move the other to the right of the original sprite, right click and select Send to Back.
6) Holding down the shift key, click on the original.
7) In the Arrange palette, click the center button
8) Flatten these (Ctrl + F).
9) Select the blurred sprite. Click Edit|Copy Channel|Alpha.
10) Select the modified original and click Edit|Paste Channel|Alpha.
11) Do the happy dance!