I'm using a Recoil gamepad I got at Wal-Mart. So I guess I need a better pad, then.
Actually, It's not the pad as I have three, A generic 10$ gamepad from a zellers, A Logitech Propad USB and a Logitech rumblepad 2 usb, And all of them don't allow me to use the pad. In the readme for Gens32 it suggests deleting the CFG file and re-trying to configure your pad to get around this. I tried myself and it didn't do the trick for me. With any luck, They're working on it because playing a game like Sonic3D REQUIRES the diaganals unfortunately.. :/
[Later addition]
I forgot to mention that the propad and rumblepad 2, While having the benefit of being rugged and all, Can be programmed to use KB keys as well as working as a joystick. Maybe one could get around the issue by setting the pad up as a keyboard. Anyways, It's an idea.