That is a similar workflow to mine but with some crucial differences, including the use of gmax (which is illegal for Blitz projects.) Look in the "art workflow" thread at the beginning of this forum for the tools and workflow I use (which is only slightly more expensive, a bit more functional, and completely legal.) The primary differences are that I use Wings3D to model and Ultimate Unwrap (the big brother of LithUnwrap, with robust b3d import/export) to texture.
Also, note that there is more to creating a 3D game than just this stuff. First off, graphically you will want a 2D art tool (like Photoshop or GIMP) and some special purpose tools like Terragen for creating terrain and skyboxes and Lightbulb for lightmapping. Second, there is sound to contend with. Some free sound editing tools include Encounter2000 and Audacity.
Finally, note that I would disagree with the file formats used to get from tool to tool. Going from Milkshape to CharacterFX is best done with the Milkshape ASCII format (which Milkshape exports and CharacterFX can import.) It is more stable (3ds files from some sources make CharacterFX really flaky) and more features are supported (including bones and vertex attachments, which I find easier to do in Milkshape.)
Also, note that there is more to creating a 3D game than just this stuff. First off, graphically you will want a 2D art tool (like Photoshop or GIMP) and some special purpose tools like Terragen for creating terrain and skyboxes and Lightbulb for lightmapping. Second, there is sound to contend with. Some free sound editing tools include Encounter2000 and Audacity.
Finally, note that I would disagree with the file formats used to get from tool to tool. Going from Milkshape to CharacterFX is best done with the Milkshape ASCII format (which Milkshape exports and CharacterFX can import.) It is more stable (3ds files from some sources make CharacterFX really flaky) and more features are supported (including bones and vertex attachments, which I find easier to do in Milkshape.)