> why wont my sprite play the animation in the game window?
I don't know, what you have posted isn't working for me at all - you should export a unitypackage when distributing unity content, otherwise there's a chance the metadata will be incorrect / corrupted
> how do I make the sprite blue background transparent?
2D Toolkit doesn't support colour keying, you will need to do that in Photoshop or similar art program.