When Source was released its renderer only supported Pixel Shader 2.0 (due to agreements with ATI) at the upper end, but later when The Lost Coast was released the renderer gained support for Shader Model 3 and the same is true of many aspects of the engine from disk access, to cloud support, the platform support and right through whole milieu of what makes a game engine an engine. The reason why Source looks so good and so current now is that VALVe designed it to be modular from the beginning which means that they can replace/update/overhaul any single specific aspect of the engine as they need to.
Also, VALVe do indeed sell and license Source to other developers in many industries too, not just game development. Unreal 2 and Warfare are very different beasts. It was a totat reworrking of 2 and it's what made Unreal Tournament 2003/4 possible. "Actually the engine you're referring to when they say "Powered by Unreal Technology" is an updated version of Unreal Warfare which is 2.5 and was not just an updated version of 2. The only reason it seems that way is because they don't sell it to other developers they don't need to put a new number after the name like the Unreal 3/3.5 engine but even today there are games that come out using an updated version of the Unreal 2 engine. Not even going to mention said: " said: " The Source Engine has got to be one of the best video game engines ever developed in terms of shelf life. Mass Effect 1, Mass Effect 2, Gears of War, Infamous, off the top of my head all have areas of busted collision geometry or just busted detection. Unlike almost every other game out there. I have never fallen thru a crack in the world or gotten stuck on a railing, or popped up onto something I can't down from in a Source Engine game. The biggest thing tho is how great the 3d collision detection is. Hmmm can't remember if the shadows were dynamic or not in HL2 - if not they are really top notch baked-in shadow maps. The dynamic lighting and shadows are probably the biggest deals and it's stuff you don't see done well on the consoles. The hi-res textures, the screen resolution, and the dynamic lighting are all very good.
I had forgotten about the HL series so it was pretty cool to find little random puzzles scattered around among the shooter segments. Been playing episode 1 and it definitely stacks up well against most games released today.