RadMenu is made and tested with 16x16 images. You can make them bigger but you probably will break the skin. Of course you can customize the skin to have bigger hovers and use bigger images with them. You can read more about external skins here:
Additionally we can help you if you can't handle it. If you only need to set in pixels the width and height of the images, you can do it with CSS for instance:
Adjust that to your liking.
What are you using PNG alpha transparency for? These hacks usually replace a DOM element with one or several other elements with different style (this ranging from elements with DXImageLoader to VML elements). This more or less breaks our rendering and thus we don't support the alpha transparency hacks. On the other hand PNG files can be 8bit or 24bit and we can't detect that as we can't apply an alpha transparency hack every time. If you send us a sample project with sample images we may be able to help you with the alpha transparency.
the Telerik team