He's always been a character...around E3 they changed all 4 of the skins though...higher quality designs.  These will be the only 4 characters available for some time though.  Of course from day one you'll be able to download user-made skins if you want hehe.

Doug Lombardi says it pretty well:

"The key difference here is terminology; we don't view Source as engine but as a constantly evolving set of technologies utilized for the creation of our games. If it's constantly evolving, it's not growing old. And, we would argue, the evolutionary approach to toolset creation allows you to evolve your game design and graphics more rapidly because you're always working with functional code (rather than halting everything for 2 years of engine development)."

Yeah the Source engine is old, but things are constantly added onto it...have you actually looked at the difference between HL2 and HL2:ep2, or L4D?  And look at TF2.  It's totally different, very smooth, clean...if it wasn't under the name "Source" I bet nobody would question the engine's credibility.

HL2: ep 3 will surely be on the Source engine, but I'm sure there will be new features yet again.  It's constantly upgraded with things that other new engines are putting out, so I don't really see the issue.