euh...well.. indeed, there's not much point on talking about weights or rigid in md2...I gues the md2 compiler you use somehow uses internally bones with rigid vertex (Milkshape only support rigid vertices) bindings. But if you do your animation with weights, smooth bending, and use an exporter like qtip exporter, or some other like it... the export is actually a "dump" of those "moments" .That is, snapshots of the smooth bended joints, poses. Later on , the game engine just pick those meshes-keyframes, and do kind of interpolation bewteen them, by code. So the result is smooth. The more keyframes(actual meshes) you use, the more accurate to your original Max -or whatever- file... But also, the more memory space filled by the md2.
This is very similar to what Gamestudio vertex animated format does... Now GS supports bones, weights, and importing weighted x format..this is quite recent, as far as I know.
- Advantages of a vertex animated system : If you use md3 compiler, you can remove frames, or just replace those by other with morph targets in heads, so to add face expressions with way more accuracy and richness than the tiny bones I use to make face expressions. Yet so, with little bones, you can make all. Disadvanatages: many. Memory, gotta restrict in frame number (due to memory, performance..) , so loosing the other kind of smoothing (in timing) , as you don't have bones, the coder wont be able to do collision per bone (typical cilinder collision around leg bone) , I'm told is quicker than per polygon. As don't have bones, late ron ,in code can't access them, and mix bones animations, trigger a leg anim whenever you need...
usually, in case of md2, way limited. It's too old.vertex trembling (seen in your example, but less noticeable than other md2 I saw) , bad shading, etc..
Not to speak of many features available in x format and not in these formats.
But yes, in md2 you have not to worry about rigid or smooth vertices. It's all smooth, as far as what it makes is a "3d photograph" of each moment of the animation: As max smooth bends the shoulder, those smoothly bent vertices will be captured as they are. So, forcing the model to have rigid bending is only limiting yourself, when the output, md2, does not need rigid bending.
I must encourage you to (and not use milkshape for md2) check qtip plugin for max. Now is trial, but the features nagged are not the important ones.
http://www.geocities.com/darinp52/qtip/
Also, this guy
http://mojo.gmaxsupport.com/
has many maxscripts(form gmax also he has) and plugins, for free, related to md3 and md2. Specially good is his MAX md3 import plugin. You could import my md3 files with it, and export as md2 with the qtip plugin. I did while in a company and worked seamlessly. Of course, there's the loss in acuracy in md2 format, that often requires to rework the texture later on to fix the "new mesh" and fix the new texture seams... :/
Indeed, that md3 mamx import plugin, maybe the most seamless way to bring a character fx animation into max, when, like in this case, you can't just export x file, open the x in Ultimate Unwrap, save as u3d, import u3d into max, having perfectly all bones, weights an animation there.For a internally wrecked file like this, vertex animation is th eonly way, importing as md2 or md3. I'd go for md3 import at least, as if u import as md2, and later export as md2, you loose two times...
I don't know if I explained myself well...
to sum it up: the Max md3 import maxscript from the mojo site will import perfectly my md3 animations into max. Then it'd be welding the mesh in frame 0 (just like in Gmax, works the same, only Max has better performance) with edit mesh command "join with threshold" (set like 0.001) , maybe asigning and overall autosmooth value of 80º. (also in frame 0) and 75 for the weapon (well, those are my typical values) . Maybe rotate both objects (non in absolute) , weapon and guy, as I think the importer rotates the axes. And bang, export as md2 using qtip (is a modifier, no appear in export dialog. You gotta hit surely hit the well known "more" button.)
I know it works perfectly. Is just I don't have Max at home. I don't have Max, now.
If you're curious, you can grab an md3 from my site and try... oh,well, I am too freaky...
ps: I have exported sveral md2 from character fx (and now that I notice, all them have some unweld edges, but for the very different problem on how I uvmapped it, as in that is also WAY limited the md2...) and they keep the smooth bending...not as weights of course, is just as I told you: a snapshot in vertices, of what once was a bone weighted animation.
Anyway, it doe snot matter. A. can work perfeclty with what we have provided, I hope

Thanks again
Sorry , long paragraphs...