Hello @RadioRahim,
Thanks for the link to the file. The reason you are getting holes I believe is because of the unwelded verts. When I put an Edit Poly on the top of the stack and weld the verts with a low tolerance, then use a ProOptimize on it I don't get holes in my mesh as you were in your screenshot. What was the result when you did it?
I also tried going down the stack and welding the verts under the skin and it seemed to have the same deformations which is nice and the bone vert assignments didn't get messed up.
I don't know milkshape or WW very well and my experience in the games industry might be different from yours, but I don't think using ProOptimize is going to give you a well deforming mesh here. You'll get something out of it but that something likely wouldn't get past art directors in a typical environment as is. From my tests that creates a pretty messy mesh with lots of pointy silhouette breakers on bone rotation. I didn't test a lot but I did notice it.
Any time I've needed to do LOD's it was done by hand and with a fair amount of TLC to ensure silhouettes and edge flow was nice and clean. Even with a 10% reduction in verts with an Optimize mod I'm seeing the knees and elbows get chewed up pretty quickly and that can't be good for the skin and bone deformations. You might have to bite the bullet here and do it old school. Optimize can be great for non-deforming meshes or sometimes heads because the silhouettes are easier to maintain, but I do want to express my skepticism about it in this case with the body. That being said I still want to help you get it working properly if you want to do it with ProOptimize.
I think it's easy to look at the model and see areas where the polys could be reduced by hand though. That way you don't need to mess with edge loops and topology around the knees and arms too much which will still give you a strong silhouette. I mostly see ProOptimize used for things like 3d Scans that are 6M triangles or a pre-bought couch model that needed to be lower poly because it was in the distance.
Best Regards,