Hi Ken,
The Fade Effect has never been officially supported which is why it is not packaged with the script. I should also point out that the fade on Greg's site uses prototype and scripolicos which are both outdated javascript librarys. You'd be better off using jQuery. The biggest problem I see is that Grey has an ID of 'image" and you have a CLASS of 'image' this may be the problem.
However, I would recommend using jQuery and doing something like this.
http://jsfiddle.net/BandonRandon/FvaR4/Then you just need to include the jQuery library and that one line of Javascript and you'll be good to go.
Also, how is it that my thumbnails are not showing any preload but it is showing on greglawler site?
Not sure what this means.