The development of "Lost Odyssey" was first proposed to Microsoft Game Studios by "Final Fantasy" creator Hironobu Sakaguchi. The first discussions began in 2003. It was a collaboration between Mistwalker, an independent game studio set up by Sakaguchi in 2004, and Microsoft. It was initially an internal project by Microsoft with Sakaguchi, but development ran into difficulties. Faced with critical problems, Microsoft decided to found a dedicated studio to help with development: this became Feelplus, which formed one part of AQ Interactive. The staff of feelplus included a large number of developers from the defunct "Shadow Hearts" developer Nautilus, and staff members from "The Legend of Dragoon" and "Phantom Dust". Among the shared staff were art director Takamasa Ohsawa. They also included developers from Microsoft and Sega. Further freelance staff were also brought in. Development started in 2004 and lasted three and a half years. Mistwalker handled the story and character design, Feelplus developed the actual product, while Microsoft provided funding, project management and testing. While development started with ten people, at development's peak it was at 150. The game's respective director and technical director, Daisuke Fukugawa and Katsuhisa Higuchi, had previously worked at Square Enix. Sakaguchi was fairly closely involved during the initial development, but during later phases he took a more hands-off supervisory approach.