"But it's as good a reason as any to explain where we are right now considering how "on track" they said they were three or four years ago."
This is one of the major problems with what you are saying. You are reading certain completeness levels in to quotes from 2005 and previously that just aren't there. 3D Realms didn't even remotely put any numbers on it. As far as that 360 thing goes, well when the 360(and later PS3) arrived it had hardware that beat top of the line PC hardware back then(it has since been beaten squarely, as is always the case with consoles), so they didn't have to throw out or redo content( or code for that matter) to support the 360. In fact developers that do cross platform development are keen to mention how easy it is to port to the 360. It uses DirectX and the same Microsoft development tools that they are use to from the PC.
"They were just as confident in 98, 99, 00 & 01."
Not really, they could never really finish the engine back then(and originally they had only two programmers to A) integrate new code from Epic in all they various highly specialised sub fields fo code B)Add their own engine upgrades in all the various C)Write all the gameplay code, D)fix bugs and do optimizations D)Upgrade Epic's tools and write their own where neccesary that is far from the case now), it was always in a constant flux. That hurdle was demonstratably over and done with by Late 2002. However it takes more than just a done engine to ship a game, ALOT more. They probably realised some of those things too late, hence the mass departures.
As far as the employee situation went, I believe that the last bios page that was online(Late 2002/early 2003) had around 20-22 people on it or so. So sure they fixed their technical issues( A MAJOR MAJOR achievement) but they quite obviously still had various issues that needed to be dealt with and guess what they DID or rather as best they could. That they might have been too little too late as they say is another matter.
Also the programming staff wasn't the only understaffed department, for instance I believe that for several years they had only one(or perhaps two) Modeler/3D Artists to do everything in the game from weapons to characters to environment art, etc.
So in other words you should see DNF as a gradual(LOOOOONG) learning process where lots of mistakes have been made but they have always been fixed(eventually!). But you can't fix what you don't know about
From what I can gather from what we know about this game, their discovery/fixing process has gone something like this:
1. Technology issues(in connection with the restart)
2. Content related issues(After uncovering such problems after the restart)
3 Production/Management/Structure related issues(Probably partly uncovered during/after 2, partly occurring as a result of inadequate fixes to 2(IE hiring too many "noobs", too high/unspecified ambitions, too few leaders under George, etc))
IMHO based on the scant amounts of information we have about it I would say that the best approximation we can do for an actual explanation of the departures(One that doesn't ignore things we do know) is
SOMETHING like this:
Hiring of "noobs" and various other matters(Like some of those mentioned above) -> slowing down progress of DNF(Without NECESSARILY introducing regress, but that could also be part of it if say a subpar artist does some subpar assets, they might have to be thrown out/replaced) - causing people to leave -> slowing down progress -> causing people to leave, etc
In other words you could(If I am correct) say that the mass departures where an example of a vicious circle and a domino effect.
Edit:
"As far as the employee situation went, I believe that the last bios page that was online(Late 2002/early 2003) had around 20-22 people on it or so."
I checked this on archive.org and I counted 20 people on the DNF team(IE not including administrative/non-DNF staff like Joe or Scott) including DNF, compare that with my list
here. Going from 20 to 30+ is an increase of 50%. Remember this is after a significant departure of people even.