There should be no insurmountable problems. You don't need to limit yourself to a measly 500 polys. The only thing the engine really freaks out over is shadow casting meshes above around ~1,000 tris. Typically you just use the skeleton as the shadow caster, so that's usually a non-issue for characters. But if you have something like a dress, you may want to make a low poly shadow caster as well (doesn't get rendered). The other thing to note is that the game does not seem to like single mesh bodies very much, so after you have your skinning finalised you'll want to split off the arms as separate meshes, so it's useful to plan for that ahead of time regarding things like UV seams. On the subject of skinning, you are restricted to only four weights per vert. If you are using Max you can set that limit in the Skin modifier.
The primary issue you'll likely come up against is that the current publicly available model compiling tools are somewhat flawed. There are some new ones on the horizon that resolve pretty much all the problems though.
Edit: Oh, and a note on smoothing. The game requires models have the number of texture verts equalling the number of geometry verts. The current public version of MDLOps doesn't handle this very elegantly, so you are likely going to want to manually detach all your UV islands to sub-meshes (or find a script to do it). This is going to give you a hard seam along your UV boundaries, so again, plan your UV layout accordingly.