The companies already have a history after working on the popular role-playing game Fable for the Xbox and Fable: The Lost Chapters for the Xbox and Windows.
The two titles have collectively sold more than two million copies worldwide, making Fable the best selling role-playing franchise on the Xbox platform, the companies said.
Shane Kim, general manager of Microsoft Game Studios, said: "[Lionhead founder] Peter Molyneux is one of the few true visionaries in our industry, and his joining us is incredibly important to the future of interactive entertainment and Microsoft Game Studios."
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