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The importer doesn't do anything with sharp edges. Any sharp edges you see are something Blender did by itself.

I understand that. But when I use for example SourceIO to import .mdl files. the models meshes are cut up, and when I select all vertices and do merge by distance and ONLY when I select the sharp edges option when using the merge by distance function do I get the exact same sharp edge layout than when I import the .smd files. So there must be a way to prevent or disable the sharpening of edges on import of .smd files.
When hovering over the sharp edges toggle, it says that it "Calculates sharp edges using custom normals data (when available) and if you don't toggle it the lighting/normals is broken. So I think the sharp edges represent the normals of how the model is imported and, thus it possibly means that importing of normals might be inaccurate.
Import .smd directly is more efficient, for me at least then importing the .mdl files with SourceIO.

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There is no need to guess. It will export whatever you are seeing in the Blender viewport.

So how does the importer decide how sharp edges look when importing a model? Because their very misleading. Maybe its cause by a merge distance with sharp edges ticked on import in the addon. would it be possible to disable that function? at least the sharp edges part of the merge by distance. Which might be a flaw with how Blender weld/merges normals and vertices.

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I've no idea, you should ask this question in a general Blender support forum.

Last question then, when I import a model sharp an edge, it will only change the normals for that edge and when I export, the export will ignore the other sharp edges I didn't touch right?

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The exporter will write the actual loop normals of your mesh as calculated by Blender. Edge sharpness will alter these values. But edges themselves are neither exported nor imported.

what would be the best way to visualize and edit these normals then?
The little spikes coming out of vertices and faces is a bit chaotic visually.
which makes it difficult to see incorrect smoothing groups.
Like in this fixes they use sharp edges to fix the smoothing groups https://steamhost.cn/steamcommunity_com/sharedfiles/filedetails/?id=2944367179
https://github.com/ValveSoftware/Source-1-Games/issues/4864
Is there a better way?

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Sharp edges aren't used by the importer. It instead imports normals exactly as they are defined in the source file. You can remove this data from Properties > Data > Geometry Data.

So sharp edges are only used to edit normals on import? And won't these sharp edges affect how the model will be when exported?

Whenever Import a .smd or .dmx model, the sharp edges seen in Edit Mode does not match the lighting from the custom normals. This might be caused by how imports work or a bug with how its done. I assume the import of an .smd automatically merged vertices by distance with Sharp edges ticked.
Also whenever whenever I export the model with the change to the sharp edges, then re-import that exported model some sharp edges changes are saved others aren't, most of the time they aren't.

No matter what I do whenever I export a model for which I've changed which edges are sharp. Upon re-import, ALL changes are reset as though nothing was donw.

Add an option where when you Append a Target, the model being imported on top of the existing, the part of model associated to the same named bones as those that already exist will move to that new position. Like how live TF2 parent viewmodel on top of viewmodels Arms.

I'm getting the same issue now, with Blender 4.0+ and Source Tools 3.3+
Haven't tested older versions.

You can also use SourceIO to import .vtf textures directly.