[quote]you are saying i should create an image that is 800,600 (my applet size) that is all translucent other than the actual gif???
[/quote]
ok, to start from the beginning. Images need to be accelerated for them to be fast. Otherwise, they are slow. 
The method createCompatibleImage creates an accelerated image for you. I will be completely blank and support translucency.
If you load an image that is 32x32 you should create an accelerated image that is 32x32.
If you read my code it is this line: (see that i set the loaded images dimensions as parameters).
BufferedImage dest = GameWindow.createCompatibleImage(temp.getWidth(null), temp.getHeight(null));
Then paint the loaded image onto the acclerated one.
Discard the loaded image and use the accelerated.
Of course, this does not guarantee that your game will run smooth. It also depends on other things, like you main loop, your AI, physics etc.