I can tell you how to do it in Paint.net, since that's what I have.
First, prepare the colors for resizing. Go to the Colors window, click the More>> button, and make both the primary and secondary colors totally transparent. Now, make it square. At the top, Image > Canvas Size..., and then make the dimensions match.
Select the magic wand tool, and set the Tolerance level at the top to between 0% to maybe 5%. Select the gray background, and press Delete. The whole background should be transparent.
Now, just resize to 32x32 and save as the format you want. That should work.
I don't know what Paint.NET you're talking about but there ain't no colors window on mine. http://img541.imageshack.us/img541/5473/61167967.jpg
edit nevermind, found it, under windows tab.
And what is Resolution? It says 96.00 for pixels/inch in the canvas window.
How do I get rid of all that fuzzy crap all around the edges of it? http://img543.imageshack.us/img543/3991/66412166.jpg
Eraser doesn't work. I tried adjusting the tolerance to 69% and that didn't work. Not sure how I can get rid of that gray stuff.
Well went back and redid it at 12% tolerance and got this: http://img211.imageshack.us/img211/4040/37238648.jpg
Still has the fuzzy edges around it. Will it be noticable you think? There must be a better tool than that wand tool.
And which format do most modders prefer? dds or tga?
And what should I do here: http://img718.imageshack.us/img718/4440/55785348.jpg
Use auto-detect or 32-bit?
When I save it as dds, it gives me these options, which are confusing:
http://img708.imageshack.us/img708/2558/14746407.jpg
http://img560.imageshack.us/img560/9919/12019903.jpg
Okay, I tested it in the CS and it looks terrible!
http://img266.imageshack.us/img266/9145/59962635.jpg