Half-Life 2's incredibly open-ended gameplay, astonishing graphics, amazing sound, realistic A.I, real-world physics, and other outstanding elements would not have been possible if the Source Engine had not been used to build the realism factor in Half-Life 2. Below are a long and in-depth list of the Source Engine's mighty features.

Graphics Renderer Features:

Microsoft® DirectX-3D® 9.0 graphics renderer API support.

Revision 2.0 (and backwards) of Pixel Shaders and Vertex Shaders, normal mapping, displacement mapping in LOD on character, weapons, items, and world models.

HLSL Authoring shader support.

Dynamic cube, cubic, and environment mapping

Dynamic lights, lightmaps, vertex maps, shadowmaps, and many other light types.

High-Dynamic Range lighting with integer formats and FP16 texture filtering/blending targets color precision capabilities & support.

Real-time water with pixel-shaded reflection, refraction and fresnel effects

Advanced particle system that can create realistic volumetric fog, intense volumetric smoke, great 3D sprite explosions, and emit other models and sprites.

Projected render-to-texture soft, fuzzy edged high-resolution shadows enable a huge amount of characters per scene without a performance hit.

Occluder entities for visibility blocking instead of 'nocliping through' (AKA ghosting) corpses and other static models.

Indoor/Outdoor environments
-Deformable geometry and terrain
-3D skyboxes extend the horizon and expand the distance and parallax map / objects possibilities.
-Dynamically rendered organic dynamic and static props (grass, rocks, trees, etc)
-Subdivision surfaces, displacement maps, diffuse, ambient, reflection, refraction, & specular normal maps
-Real-time specular based radiosity dynamic lighting
-Effects include but are not limited to: real-time particles, shader defined beams, volumetric smoke, sprite sparks, detailed pixel shaded blood, environmental effects like volumetric fog and realistic rain
-Scalability Direct-X 7 to Direct-X 9 generation graphics hardware support.

Advanced Materials System Features:

Instead of traditional textures, Source defines sets of materials that specify what the object is made from and the texture used for that object. A material specifies how an object will fracture when broken, what it will sound like when broken or dragged across another surface, and what that object’s mass and buoyancy are. This system is much more flexible than other texture only based systems.

Materials can interact with objects or NPCs such as mud or ice or sand for vehicles to slide/lose traction on.

Multiplayer Network Code Features:

Time play and hardcore gamer tested by millions of gamers all around the globe

Full support for both LAN based multiplayer and Internet based multiplayer games.

Prediction analysis for interpolating collision/hit detection system.

Professional Optimizations for high-latency, high-packet loss dial-up connections to low-latency, low-packet loss broadband connections.

Advanced Characters Features:

Extremely detailed and believable character models

Very realistic eyes
-Focus on player/object, not simply parallel views
-Proper eye "bulge" for realistic eye reflections

Simulated musculature provides emotions, speech and body language

Language independent speech, characters can naturally speak in many languages

Skeletal/bone system for animation

Layered animation system can synthesize complex animations out of several pieces

Physics System Features:

More responsive world with realistic interactions thanks to ragdoll physics system

Sounds & graphics are capable of reacting to the realistic physics

AI characters can interact with physically simulated objects

Ropes/cables, machines, constraint systems, ragdoll physics

Physics can be controlled by level design

Kinematic animated skeletal bone system followers

Custom procedural physics controllers

Vehicles:
-Wheels slip and skid
-Realistic suspensions with springs on each wheel
-Realistic leaning during acceleration/deceleration and turning
-Individually tunable parameters such as horsepower, gearing, max speed, shift speed, tire material, tire friction, spring tension/dampening etc.
-Multiple players in a vehicle in multiplayer
-Hovercraft support for cheaper simulation

Advanced Character A.I Features:

I/O system allowing level designers to control AI

Sophisticated navigation: characters that run, fly, jump, crouch, climb stairs and ladders, and burrow underground

AI senses things using sight, sound, smell

AI relationships determine friend/foe status of other entities

Battle AI allows squads of AI characters to operate together, know when to advance, retreat, lay cover fire, etc.

A new AI system has recently been implemented for the upcoming Aftermath expansion pack for working with Allies and collaborative action, an improvement of the previous AI basically.

Audio system features:

5.1 surround sound, 4 speaker surround

Directsound3D support

High-quality 3D spatialization

Custom software DSP

Automatic DSP based on environmental geometry

ADPCM decompression

16-bit 48KHz & 24-bit 96KHz, stereo wave data with all features

MP3 decompression (requires Miles license)

Support for audio streaming on any wave

Real-time wave file stitching

Pre-authored Doppler effect encoded waves

Pre-authored distance variant encoded waves

GUI features:

Server browser - Displays all active game servers and allows a player to choose which one to participate on. Players can filter and sort server lists in order to speed up the display and selection of a server.

Friends instant messenger - Allows players to message each other both in and out of the game as well as join friends in existing games. No more confusion about what server your friends are on, you can easily join with this feature.

VGUI - Valve's custom GUI interface mimics most of the windows controls but is rendered using the Source engine for both in game and out of game uniform UI display. VGUI is platform independent and is Unicode compliant for ease of localization

Core game mechanics programming langauge features:

All code written in C/C++ using Visual Studio 6.0. Easily and quickly derive new entities from existing base classes.

Internal context sensitive performance monitoring system

Graphics Renderer frame-rate benchmark performance measurement tools built into the engine

Modular code design (via DLL's) allows swapping out of core components for easy upgrading or code replacement

Direct-X 9 shaders all written in HLSL

Tools Features:

Faceposer
-Facial expression tool used to craft speech and emotions

Valve Hammer Editor
-WYSIWYG World editor
-Create world brushes
-Terrain editor
-Place detailed world models and AI NPCs
-Set navigation points/paths for NPCs
-Place triggers, clip brushes, logic etc.
-Allows level designer to hook up I/O between entities to control AI

Half-Life Model Viewer
-Full, real-time 3D model previewer
-Rotate models in any direction in real-time
-Setup skeletal hit boxes
-View ragdoll physics hull
-View normal maps
-Wireframe, UV map, mesh, shaded or textured view modes

Studiomdl
-3D Model compiler

Vbsp, Vrad, Vvis, VMPI
-Map compilation tools (bsp, lighting and visibility)
-VMPI distributed compilation tool allowing level compiles to be spread across many PC's greatly reducing compile times

Exporters
-Soft Image | XSI, 3D Studio Max and Maya .smd exporters for exporting 3D models

That's it for the current list of engine features, more will be added in when more information arrives.