The source engine got it's big update in Episode 2, it's on par with just about any FPS engine out there (bar cry-engine, the engine that makes your computer cry tears of shame and you cry tears of amazement, until the lag causes you to miss a shot and alert a whole NK base, and that's not too uncommon either), and hey, the skin doesn't look like plastic (yes, I'm glaring at you Bioshock, even though you were released years earlier and I loved you so much).
The problem in terms of appearance comes from the re-use of older game models, which worked, but show their faded early just post bump map (and thus introducing normal map) state. Their physics engine could also be better applied, I mean, sure, we can apply weight to one end of a physics enabled object and make the other end tip, but we've been able to do that for at least 5 years now, can't we do something more interesting with physics now? And no, pre-scripted physics for house explosions does not count, even if they are awesome, if... lacking in appropriate disintegration. The weapon set also feels very samey, I mean, how long will it be until they can make a grav gun that doesn't look like half the UVs are missing (the UV warped poorly textured bars and front plates). Thus far, we've gotten 1 new thing to throw at our enemies, which might never appear again, and we have an alien invasion of Earth going on. Albeit, the aliens in question typically re-purpose life forms for use as weapons, but give us something, give us a weapon that when dropped tries to attack us, because it's alive, or even just an improvement on the current weapon set, IE: an automatic shotgun, or semi-auto, or a new grenade type (hopwires did have problems, but damn they looked awesome.
To bring up their appearance, they need to do new rebel models, new combine models, new head crab and zombie models, and in general remodel most of the basic things, but the assets may be good enough that they can re-use them with a simple texture upgrade and look up to par for an episode.
I am a big fan of the HL series, but Valve could use a better PR team for that license. The adds for the team fortress 2 improvements are brilliant, but we've yet to see so much as a glimpse of the next game in the series that attracts their core audience. Over the years, Valve has been semi-recuslive until recently. Pushing back HL2 again and again while dropping content again and again, effectively grinding off most of the more epic back drops and more interesting character types in favor of making what they had better. Now they're pushing back HL2:Episode 3, and not even releasing a single detail; it builds anticipation, but anticipation is like water pressure, and when it gets high enough, it starts leaking, and then it starts pouring, and then we have another HL2 beta leak, though that was one of the worst case scenarios and it'll probably just result in the leak of some in-house demo videos and artwork.
