It's a tiled texture that is displayed in chunks,
Each tile is a frame, LSL has a special function ti display these tiles as animation but the tiles have to be a power of 2 in width and height. (2 4 8 16 32 etc) Also making animations it's best to try and keep frames to that amount.
If you have a non looping animation with 65 frames, it's bette rto use only 64 frames.
Because 64 frames is 8x8 wich fits perfect.
For 65 you'd need 16x16!!! a quarter of the quality of your image!
To create them and read about the details behid it visit http://www.mrmonke.net/anigifTolsl
It lets you upload an animated gif and edit it -in your browser- per frame.
You can pick what frames to use, what frames to skip in various ways and set animationspeed.
The site generates a texture to use in Second Life and a LSL script to use in secondlife.
FAQ: http://www.mrmonke.net/Forum/gif2ani.aspx?g=posts&t=6 Example: http://www.mrmonke.net/Forum/gif2ani.aspx?g=posts&t=7
If ever LL decides to have greater textures. (It's 1024x1024 now) each step would mean 4x the frames we have now or 4x the quality But i don't think that will happen becauseit will also mean they have to use 4x the bandwidth