Sweet! With a little digging around and a little help from a member of the Cinema4D forum, 3DAttack, it seems this is more than possible!
With the additions made to the Source engine when HL2:Ep1 got released, the phong shader was amongst them!
Screw me sideways if this isn't what I was after! The final result is a lot closer to my rendered model, and there's no reflection present!
I'll explain in slightly plainer English than the dev wiki does.
A normal map is simply a transparent image sitting over your model. When light is cast across the surface of the model, the normal map will produce shadow by calculating how the light is hitting the normal mapped image, and how the image should interact with that light.
The problem is, for the light effect what the player sees, it needs to ot only interact with the normal map, but also a surface property. This surface property normally comes in the form of a reflection in HL2.
When the cubemaps for a level are built, images are captured from each face of the cube, and then projected onto the surface of the model at rendertime, giving the false illusion of a reflection. The light and shadow that is generated from the notmal map then has a way to apply itself.
This is very handy, but in case of my model, and skin on characters, you find that you will need to apply a normal map to surfaces that don;t actually reflect all that much. This is where Phong shading somes in.
Without going into the technicality of what Phong shading is, it produces the kind of specular highlights that you can see in my above example. It will give the impression that light is bouncing off a surface and producing highlights, WITHOUT displaying the reflection of the surrounding environment. For matt paint, this is extremely handy, as you can have a normal map without making the paint appear glossy.
So, there you go! I simply added some lines into the VMT, and bingo! The following is an example VMT with a phong shader applied, commented to maybe cast a little light for others!
"vertexlitgeneric"
{
"$basetexture" "models/Alyx/alyx_faceandhair"
"$bumpmap" "models/alyx/alyx_head_normal"
"$halflambert" 1
"$nodecal" "1"
"$model" "1"
"$phong" "1" - This is a boolean value. 0=off, 1=on
"$phongexponent" 33 - The Phong Exponent is how the specular highlight appears. A lower value will spread more, and be generally less defined, whereas a higher value will be a lot sharper, and the highlight will be a lot tighter. You can exemplify the differences by imaging that the lower values will result in matt paint, or dry skin, the higher value would look more like gloss paint or sweaty skin. This overrides the use of a specular map.
"$phongexponenttexture" "(path to texture)/(texture)" - You can specify a greyscale image here. If the $phongexponent is commented out, this will act as a specular map, black being lower on the specularity scale, and white being higher, with degrees in between. I've yet to test this myself, but in theory, my spec map is pretty dark, with the edges of the model picked out in a white falloff brush. The result should be a rather matt finish to the model, except where the edges have been worn over time. I could combine an eviroment mask to make these areas appear slightly reflective as well.
"$phongboost" "6" - Boosts, or makes the effect more apparent in areas with specularity. I think that used in conjunction with HDRI, this would give some nice blooming effects an bright surfaces?
"$phongfresnelranges" "[0.05 0.5 1]" - Really not sure what the values mean. Experiment. Fresnel gives the appearance of a halo effect around the object. Imagine looking at a glass ball. The way the light hits it gives it a fresnel effect, causing the very edges of the ball to bounce a lot more light than the actual ball does towards the centre facing the viewer.
Hope this gives you a little insight into the phong shader. To be quite frank, this is freaking sweet! Now I'm a happy chap! Lol!
Here's some examples of the shader on my model. I only actually tried this about 20 mins ago before I started to feverishly write this post, so there's quite a few problems, like the strange artifact that I've pointed out in one of the images., but as you can see, it's worked pretty well.
If anyone can talk more broadly on the subject, I would be interested to see what others have done with this shader!