Looks like someone has managed to make clothes editing here.

http://www.coregrafx.info/sexy/moegrafx.php?res=1685

Don't know how they did it though.

So I'm guessing that if I want to edit like "boots that are too high" which I want to shorten them down by making an alpha channel, its gonna be like a transparent space on the game huh?

Is it possible to edit and put the "edited" clothing texture back into the game without using 3dmax?

Are you guys using a modded Xbox 360 for this?