Would it be possible to create an item in something like 3DSMAX, Lightwave and export it to a PNG file and have that actually be able to work within the game? 

I am thinking that you make a high quality object to give the game more detail.  If this is possible I could start making/remaking objects for the game.

Lord SilverStone

Yes it is!  Have a look at my graphic thread that does just what you are describing (only with Blender and GIMP).  It is a big thread, and when I started I knew nothing, and now I know a little bit ... so if you skim read through it you'll see some of the problems I initially had and what is possible now.

Torchwood's artwork

I also use the Daimex script ... here ... that takes care of rendering the final images at the correct size and camera angles.  You would presumably need something similar in 3DSMAX ...

You could also look at Lord Grunt's thread ...

here

I made this script for Blender (open source 3D modeler/animator/gamemaker...):
http://www.daimonin.com/empty-t6110.0.html

Torchwood has done a lot of awesome things with it:
http://www.daimonin.com/empty-t5398.0.html
he also has made a nice tutorial:
http://www.daimonin.com/torchwoods_blender_tutorial_warning_picture_heavy_thread-t7054.0.html

EDIT: hmm looks like Torch was faster... darn...
EDIT2: Torch mention LordGrunts work, which is really nice too, but be aware that its done with different tool - POV-Ray - which is... well... errrm... too difficult to explain   -> http://en.wikipedia.org/wiki/POV-Ray

I have heard of blender and have heard it is an awesome program but also heard the learning curve on it is pretty steep.  I will have to grab your script and see what it does.  I mainly use Lightwave and 3dsmax for the 3d stuff and then drop it in Photoshop to clean it up.  I may grab blender and see how bad it is for the learning curve on it.

Lord SilverStone