Variety reports  many ex-employees from Midway say the company’s reliance on the licensed Unreal Engine weakened the struggling publisher/developer.

“The mistake we made was, instead of just taking the base Unreal 3 engine that Gears of War was made on and building games off of that, we let our tech and product development guys try to really modify the engine to add all these different things,” an ex-employee told Variety’s Ben Fritz. “It was a ton of new technology which they just weren’t capable of doing. It put all the games way behind schedule.”

Midway had to alter the UE3 engine, licensed from creator Epic Games, for every project individually, meaning its developers didn’t benefit from having shared resources. Many of Midway’s titles were delayed as a result.

Strapped for cash, Midway was forced to release games like Blacksite: Area 51 before they were ready, leading to very negative reviews and poor sales.

Released on Tuesday, Mortal Kombat vs. DC Universe is Midway’s best hope for significant income during the holiday season. The game has received mostly average reviews so far. Football game Blitz: The League II was released in October to mediocre reviews. Wheelman, based on a Vin Diesel action movie, and open-world game This is Vegas are scheduled for release in early 2009.

Midway posted a $75.9 million loss in its 2008 third quarter. Chairman Shari Redstone resigned and the company laid off some employees from its Chicago studio. Earlier this year, Midway laid off employees from its Austin studio and closed down its Los Angeles one. 

Along with Mortal Kombat, Midway’s biggest IPs include Rampage, Gauntlet and the rights to games based on TNA wrestling.