There was no problem with the dialog like that in the mix. In fact, it made it easier as it jelled much more together with the BG’s etc. EA Sports and various other games are still using this method on some of their games to great success.
Think of it in this way though: You can have pristine recordings that might be great for a mix,, or you can have raw gritty recordings that have the needed emotion, phaseshifting etc., and still work perfectly well in a mix. I know which one i’d pick :)

Games in general use too much “saturday morning cartoon style” dialog, and a lot of it has to do with the way it’s recorded, and the way the actors feel comfortable, how they move, how they react.

I’ll take a real sounding dialog line recorded in a noisy spot over a pristine line that feels “sterile” any day. It’s emotion and believability that we are selling. The user doesn’t care that the line was nice and clean during the recording.