Croteam hit gold with the first two games. It was simplistic game design that worked brilliantly when all the elements were thrown together (the kamikaze has to be one of the best enemies ever in a shooter). Immense fun to play through with co-op as well. Selling the game at half-price also earned them a ton of goodwill in the market.

I think the moment they decided to try compete with regular AAA games, they pretty much shot themselves in the foot with a cannonball.

Incidentally, I never played Half Life: Source. Considering the kickassery of HL and the robust nature of the Source engine, that seems like quite a glaring omission.

HL: Source is also a very schizophrenic beast. Source style water effects, lighting and physics meet HL's original textures and models. You have to do some jugaad to run the game with Blue-Shift's Hi(gher)-definition model pack. I think Valve's main objective was to have it as a Steam showcase since it makes HL compatible with all the community features. Native widescreen mode is another advantage.