I don't know exactly how all these things are accomplished for the game engine, but I do know from the several thousands posts I've read that all of the following are possible using the GLSL shadders.
You can bake a low poly model and make it look like a high poly model:http://www.tutorialsforblender3d.com/Ga ... index.html
And you can use the full range of texture file types, and all of those can be baked into one image. (I haven't actually learned to bake anything yet
Advanced texture settings will become available when you have UVed your textures, and you can then set the amount of light scattering, (and the height from the surface of any texture applied) etc.
You should also be aware that you are supposed to have 3 light sources to get all the shadding effects GLSL can produce within the GE.