I can understand some or most of them being lost but not all of them

It's hard to transfer source code. Mainly because it's often shared between different projects, some of which are not being licensed. It's very unusual for a deal to take place where the source code is supplied in anything other than via an escrow company.

how does reverse engineering work?

Not making things easier is that source codes are usually scrapped when a game is no longer supported. There have been a lot of controversy over this in recent years, since it means pieces of gaming history have gone lost forever; probably never recoverable unless the code can be reversed-engineered from the game itself. Which is - in a word - complicated.

Edit: http://en.wikipedia.org/wiki/Reverse_engineering#Reverse_engineering_of_software

Very slowly with a debugger.