Ha! I settle this "once and for all" every few months.
No, the switch never happened. Most all the other Quake 1 licenses -
Diakatana, SiN, etc. -switched from Quake 1 to Quake 2 before shipping. We
did not. We were done with our engine changes by the time Q2 was released
and spent the remainder of the time on our game code; the code that comes in
our SDK. HL was, and still is, a modified Quake 1 engine.
Some confusion stems from a bug fix we did late in the project. We found a
bug in our game that we traced back to the original Quake 1 code and asked
Carmack about it. He remembered the bug and told us where he had fixed it in
Quake 2. We looked at the Quake 2 code, found the one function - about 20
lines - and copied it from Quake 2 into our codebase. Other than that one
function, everything from id in HL comes from Quake 1."