Even though Midway invested millions in building a common tech base for all its studios, apparently they all had to adapt UE3 for each project, which meant they couldn't share resources in a timely manner, so none of the promised benefits materialized. Making the code work for PS3 was particularly hard, sources said, and so games just weren't coming out. Look at the first half of 2007, when all Midway shipped was "Lord of the Rings Online" for Turbine, or the first half of this year, when all it shipped was "Unreal Tournament III" for Epic.

Combine that with Midway's relatively weak cash position, as former Chief Marketing Officer Steve Allison explained, and it was a recipe for disaster.

"The delays of next-gen titles pushed them into a window where money became very tight for the company," said Allison, who's now CMO for TNA Wrestling, for which Midway makes licensed games. "When that happens decision-making can become focused around not always what is best for each title, but how to fix cash flow issues. This is a spiral of doom in videogame publishing because you can't ship compromised titles against the exceptional quality level of competition that is on the shelves."

Still, he added, "Most of those problems should be behind Midway now."

The perfect example of that "spiral of doom" came in the fall of 2007. "Stranglehold," the highly touted action game developed with John Woo, had been delayed for nearly a year and ended up costingt over $40 million, but it finally hit store shelves just one week before "Halo 3." Combine that with so-so reviews and suffice it to say it didn't turn out well. The game sold only 320,000 units domestically, according to NPD.

Then Midway was in a really tough spot. With "Stranglehold" not performing, it needed money. Which led to the November disaster that was "Blacksite: Area 51," a game so compromised to get pushed out the door even its own director famously badmouthed it two weeks after release.

"'Blacksite' was a game that clearly wasn’t ready," recalls the ex-employee. "Everyone was like, 'Push it to Q1,' but 'Stranglehold' had bombed and we needed another game out the door; we needed revenue."

Not everything was a disaster. The "Happy Feet" tie-in game sold nearly a million units in the U.S. and didn't cost much. The first "Blitz' did well enough to merit a sequel. Original "NBA Ballers" sold quite well, though the sequels failed.

But Midway's slate is small. It's doesn't have a big line-up like Activision and EA full of profitable sequels that can subsidize the majority of original properties that inevitably won't peform in search of the 12% or so that do. The simple fact is that Midway needed its new games to be hits and they weren't.

Sumner Redstone and his daughter Shari -- who famously don't get along too well but share a lot of family assets -- weren't too involved until late last year, when Shari took over as chairman and, not long after, fired CEO David Zucker. Word is that a big name exec was being wooed to take over, but when he backed out, interim CEO Matt Booty (by all accounts a good guy, but not an experienced corporate executive) ended up staying in the job longer than planned, especially as things went downhill and it became even tougher to recruit a replacement.

So what happens now? If "Mortal Kombat vs. DC Universe" performs, Midway will get a short reprieve, but won't fundamentally solve its severe liquidity problems. It will have to find a very optimistic investor, go into bankruptcy, and/or sell off its core IP (although then, one has to ask, what's left?). Most likely, sources and analysts say, it faces a future Atari's, where the name might survive, but the company will have to sell off a lot of what it is and almost re-start from scratch.

"Midway has some great IP hidden in the vault," Allison noted. "'Rampage' quietly did a million units on Wii and PS2 a few years back. 'Mortal Kombat' is a great IP that has survived the decline of the fighting genre. Then there's 'Gauntlet,' 'Rush,' 'Blitz' and many others that could be reborn in the right hands. If 'Fallout' can make the incredible transformation it has in the hands of Bethesda, then the right team with the right vision can make something from the history there."

Related article: Midway Games struggling to survive