the graphics hardware, directx and opengl don't support smoothing groups. if an edge is supposed to be hard, then the vertices have to be split at that area. that's how it works.

smoothing groups just are a workflow improvement for modeling applications, so that modelers don't have to work with doubled vertices all the time which would be a pain. (actually smoothing groups still are a pain. something like maya's soft/hard edges is much nicer to use. )

it's a disadvantage that MED and WED don't support smoothing groups but since most people don't really model in there anyway it shouldn't be a big problem. the mdl7 exporter or MED/WED importer you use should split vertices automatically according to the smoothing information of your model. or some applications like blender have a split modifier which can do this before exporting.

many other engines like ogre3d don't support smoothing groups either. it's an importer/exporter thing and if it doesn't work for you then you either do something wrong or the importer/exporter isn't working correctly. from this thread it's hard to say where exactly your problem lies.