In the times of the Sega Saturn and the heyday of Sega's arcade development (releasing such classics as Virtua Fighter 2, Daytona USA, and Virtua Cop), Sega's various development teams had cryptic names like "AM2" and "AM3". However, Sega's fate was and is tied to keeping talented producers like Yu Suzuki and Yuji Naka as well as their experienced teams with the company, and, in 1999 and 2000, reorganized their teams and gave them memorable names.
Since then, many of these teams have broken up or been reorganized, especially as Sega went through increasingly difficult times after the death of the Dreamcast.
Sega has 11 teams at last count, all independently developing games for various consoles and handhelds, as well as the arcades.
Sonic Team - The first team to earn a non-AM name, Sonic Team, headed by Yuji Naka, is quite possibly the best known and most successful of Sega's develpment teams. Sonic Team has a lot of successful games to its credit, but best known are the Sonic the Hedgehog series and Phantasy Star Online (along with cult classics Chu Chu Rocket and NiGHTS into Dreams).
Sega-AM2 - Now headed by Hiroshi Kataoka of Burning Rangers fame (and founded by Yu Suzuki), this was one of the few teams to rise to prominence under the old "AM" naming convention. This is one of the longest-lived teams, having developed such classics as Outrun, Afterburner, and Virtua Cop, and notable recently for the Virtua Fighter and Shenmue series.
Digital Rex - Digital Rex is Yu Suzukis new team, but has no completed US credits to date. Apparently the seed of Rex was the Shenmue development staff, although most of the Shenmue team is still with AM2.
Amusement Vision - Headed by Toshihiro Nagoshi, this arcade-focused team is slowly adapting to Sega's new emphasis on consoles. AV is best known for Daytona USA and Super Monkey Ball, and is currently focusing on GameCube development.
Smilebit -Their history is highly eclectic, ranging from Panzer Dragoon to The Typing of the Dead to Jet Grind Radio. In 2003, Smilebit and AV made a trade. Smilebit took AV's sports team, whereas AV took over Smilebit's non-sports talent. Smilebit now focuses on sports games for the Japanese and European market.
Hitmaker - Formerly known as AM3, this team has an excellant arcade history over the last few years, releasing hits like Crazy Taxi, Virtual On , Virtua Tennis, and Confidential Mission. This was only enhanced when they absorbed the remainder of Sega Rosso in 2003. Hisao Oguchi, current president of Sega Corporation (the home Japanese company) is a former Hitmaker head.
Visual Concepts - VC is the only team based in Sega of America, and is responsible for the 2K/ESPN Sports line of sports titles.
WOW - A quietly prolific team at Sega, Rikiya Nakagawa's team is responsible for such series as Golden Axe, House of the Dead, and Sega GT. At the moment, WOW seems to favor developing for the Xbox and the arcade.
Overworks - Formed partially from the original Phantasy Star team, Overworks has something of a reputation for making RPGs, like Skies of Arcadia and Sakura Taisen, although they also did both of the recent Shinobi sequels. Since shortly before the beginning of development on Nightshade, they are a semi-autonomous part of WOW, rather than a seperate, discrete team.
Wave Master - Wave Master is an odd team, almost entirely devoted to producing soundtracks, having worked on such games as Sonic the Hedgehog, Sonic CD, and NiGHTS. The only notable game WM has developed is the oddball roommate simulator Roommania #203, which has never been released in the US.
Of course, Sega has had other development teams in the past, disbanded as key members retired, defected, or were transferred. Info on past teams not listed here would be much appreciated. A handful of them are...
Team Andromeda - Creators of the Panzer Dragoon series, this team fell apart due to creative differences after the end of that series. Smilebit had the largest remaining group of the original staff, but most have either left Sega or shifted to Amusement Vision.
United Game Artists - Tetsuya Mizuguchi's team specialized in music and rhythm games, like Space Channel 5 and Rez, but, in 2003, when Mizuguchi's proposal for a sequel to Rez was rejected, he left Sega. UGA was basically dead after this, and the remaining members were transferred to Sonic Team.
Sega Rosso - Led by Kenji Sasaki (who collaborated on Sega Rally 2 while he worked at AM3) and largely formed of defectors from Namco's Ridge Racer team, Sega Rosso was all about racing games. Games this team has released include Star Wars Episode I Racer Arcade and Initial D: Arcade Stage. Sega Rosso was absorbed by Hitmaker in 2003.
Sega.com, Inc. - Not a development team but an independent company, Sega.com developed SNAP (Sega Network Application Package, Sega's online gaming software for the Dreamcast) and operated SegaNet, a short-lived ISP devoted entirely to online play using the Dreamcast. Sega.com didn't long outlive the Dreamcast, though, and it was sold to Nokia in August 2003. Nokia is apparently putting SNAP to use with the N-Gage.
Sega is currently owned by Sammy, distributes Capcom's arcade releases (including Capcom vs. SNK 2) in the US, and licenses its series to THQ for development and publishing on the Game Boy Advance.
Someone else may flesh this out in a larger w/u (or I might get around to it).