I'm not sure how exactly to explain it, but:
First image - these perpendicular to each face blue lines you're seeing are normals. They determine orientation of each face.
You can watch this short video to get a better idea;
Second image - every face is shaded as flat;
Third image - everything is shaded as smooth;
Fourth image - everything is shaded as smooth BUT the edge loop that is sharp.
s4s split the mesh along uv island borders to avoid these dark shadow along sharp edges you're seeing on the third pic
In Blender there is Auto Smooth feature that allows you to specify "maximum angle between face normals that will be considered as smooth". You can also mark any edge as sharp, even those that do not go below or close to 90d. However, these adjustments will have no effect in s4s or the game.
By default both s4s and the game shade everything as smooth, sharp edges included. To make them shade these edges as sharp you should either split the mesh OR uvs along the edge loops that you want to be seen as sharp. The result will depend on the way you choose.
First image - split mesh;
Second image - split uvs, mesh is not split.
When you import a blend file in s4s, it splits the mesh along places where its uvs are split, so uv islands borders. This is how you get sharp edges but no extra definition like on the first pic. BUT if you export this file and import it again, s4s will give extra definition to those edges it split the first time.