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Factor 5 began when five employees of a German games company, Rainbow Arts, left to form their own studio, headquartered in Cologne, Germany. While in Germany, Factor 5 developed numerous games from the Turrican series for the Atari ST, Super Nintendo and Sega Genesis. Factor 5 moved to San Rafeal, California in 1994 and around that time established relationships with Nintendo, becoming a 2nd party developer, and Lucas Arts, frequently making games based on their licenses. In addition to developing full games, Factor 5 also developed games technologies like MusyX: Dolby Sound Tools and DivX For Games SDK.

In 1998, Factor 5 released Star Wars: Rogue Squadron, arguably their most popular game, becoming one of the best selling games for the Nintendo 64. In 2000, they developed two more games based on Lucas Arts properties, Star Wars: Battle for Naboo and Indiana Jones and the Infernal Machine, both for the N64.

With the launch of the Nintendo Gamecube in 2001, Factor 5 released a sequel to Rogue Squadron, Star Wars Rogue Squadron: Rogue Leader, which was the 2nd best selling title at launch. In 2003, Factor 5 released their last to date, Star Wars Rogue Squadron III: Rebel Strike.

Factor 5 left Nintendo at the end of that console generation and began an exclusive relationship with Sony for their upcoming Playstation 3. Their first and only game released together is 2007's Lair, which was received negatively by critics and sold poorly on release due to its imprecise controls and numerous technical issues.

The critical and commercial failure of Lair, as well as the dissolution of Brash Entertainment (for whom Factor 5 was developing a game based on Superman), put Factor 5 in financial trouble. In May 2009 it was announced that the developer had officially closed its doors and the company is currently in a lawsuit with former employees regarding the company's inability to pay them in its final months.

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