The Texas-based developer, known for Xbox 360 Kinect title The Gunstringer, will now develop exclusively for Microsoft's platforms.
Other first party studios owned by Microsoft include Rare Ltd, Lionhead Studios, Turn 10 Studios, Good Science Studio and 343 Industries.
"Twisted Pixel has an incredible track record of delivering innovative, critically acclaimed, and most importantly, fun, games," said corporate vice-president Phil Spencer.
"Microsoft Studios is home to cutting-edge entertainment experiences, and the incredible creativity of the Twisted Pixel team will help drive further innovation around Kinect and Xbox LIVE."
Twisted Pixel co-founder and CEO Michael Wilford added: "It is really exciting for us to solidify our long-standing relationship with Microsoft Studios, who we consider to be the leader in digital distribution and creating new innovations in gaming like Xbox LIVE and Kinect."
Watch a trailer for The Gunstringer below:
"As part of the family of Microsoft Studios we look forward to bringing even bigger and richer experiences to Xbox and Twisted Pixel fans around the world."
Founded in 2006, Twisted Pixel handled contract work for Midway Games before releasing its first Xbox Live Arcade title The Maw in early 2009.
It was followed by cult favourite 'Splosion Man later that year and Comic Jumper: The Adventures of Captain Smiley in 2010.
Its latest title, The Gunstringer, was originally intended for Xbox Live Arcade before it became a full retail product.
> Read our review of The Gunstringer