Here is how I convert a sprite to a cross stitch pattern. I use KG-Chart for the cross stitch and an old version of Photoshop for the image editing. You can use Paint just as easily for this type of work, but then you don't have as many options for layers and undoing steps. Though I am doing this with a "sprite", it will work with any small image.
This tutorial will show you how to go from a small sprite to a cross stitch pattern.
Tutorial after the jump!