That's the word from GamePro (via LocalTechWire.com, via Kotaku), anyway, and while I think the price tag sounds a bit steep, the deal would make sense.

It makes sense for Microsoft for two reasons:

1. As pointed out in the original article, Epic is valuable not just for the franchises it has created (Gears of War and Unreal Tournament), but for the royalties it collects for licensing out its Unreal game engine to other game makers.
2. With the departure of Bungie, Microsoft is surely looking for a top-flight development studio to take over the Halo franchise. Epic fits the bill nicely.

The deal makes sense for Epic for one reason:

1. $1 billion!!!!

If the deal does happen, though, it will be interesting to see whether Microsoft continues to license Unreal to developers working on PS3 games, or whether Unreal becomes an Xbox-only technology.