An indexed image is a special type of image that has been indexed, which limits it to a 256 color palette, and also removes the ability to use alpha transparency unless on some occasions (some programs, like Adobe Fireworks, allow saving as indexed PNG with 8-bit alpha transparency). Indexable formats include PNG and GIF (the GIF format is always indexed).
Because the indexed image stores colors off a palette instead of individual color data per pixel, it creates a much smaller file size and much better compression for the image. Due to this, programs such as Microsoft Paint index images using an optimal palette, so that the file size is automatically reduced. However, MSPaint does not allow images to be un-indexed, which limits people to the colors they used previously the next time they open the image.