There are programs (free ones) you can get that will load in files of different kinds to export as .X - I'm not entirely sure what ones load in Milkshape files, there's probably a sticky in the 3D Board with the information.
As to making your levels in a modelling package - yes, that's what the default would be. If you want a level editor, you'll have to write your own or find one of the ones made seperately.
Generally, you'll do this:
load object "mylevel.X",1
where mylevel.X is the filename of the level (and would be in the same folder as your project) and the 1 is the internal number that DB uses to reference that object. After that, you can:
scale object 1,200,200,200
position object 1,0,-20,0
rotate object 1,0,90,0
Which would increase the size of your level object by double (200 percent), position it just below the centre of the world (-20 in the y-axis (up and down)) and rotate it by 90 degrees in the y-axis (spinning like a spinning top).
So as you see, you can scale the objects in DB with the use of the Scale Object command. It takes percentages, and can be scaled non-uniformly - as in, you can squish and stretch them.
Probably the first thing you'll run in to trouble with, is collision. But don't worry - there are tutorials and guides on how to get collision in, as initially, you'll be able to just walk through everything.
As a last point - it might be good to create your objects to the correct scale anyway (I recommend keeping a human-sized model as reference in your 3d package scene) - that way, you don't need to bother scaling them - or if you have to do it later to all objects then the numbers will be easier. Shouldn't take more than a few seconds to scale it in Milkshape, anyway
