Since I'm fairly new to this (only 1 entry thus far :p), is this always fan-fic or do we ever do a specific character? just wonderin
The "Monthly Challenge" is usually a broad category so that people can do what they want. Past examples have been Gladiators, Rebel Troopers, Bounty Hunters, etc.
You don't have to do Fan Fiction, but you can if you want. For example, if the category was "Vehicles" you could do up a fan-fic vehicle like CHEWIE shows, or you could tackle an actual movie vehicle (like the Sith Infiltrator). Either works becaise they are both "vehicles".
Or, like this month's category - Gladiators. You could do up a total fan-fic gladiator or you could make one of the Cartoon gladiators. Either way works.
The "Group Project" on the other hand, that is the one that focuses on a specific character (or two) - Isard, Daala, Tonnika Twins, etc.