In 2000 all of Sega's in-house Consumer (CS) and Amusement Machine (AM) R&D departments were separated from the main company and established on 9 semi-autonomous subsidiaries, with each subsidiary getting an elected president as a studio head. However, for more financial stability, Sega began consolidating its studios into six main ones (Sega Wow, Sega AM2, Hitmaker, Amusement Vision, Smilebit, Sonic Team) in 2003, and merged them back into a uniform R&D structure in 2004.
Smilebit was formed from CS1, which contained staff from the Panzer Dragoon series, sports games and PC conversion staff. It was headed by Shun Arai and Takayuki Kawagoe. While continuing sports-related games, the studio became more known for its high-end console games. Which includes Jet Set Radio and Hundred Swords for Dreamcast, and the Xbox trio of Jet Set Radio Future, Panzer Dragoon Orta and GunValkyrie. Due to the teams experience with converting games to the PC since the mid 90's, the team was quickly able to get high performance of the Xbox. This part of the team became assigned to Amusement Vision in 2003. Due to this the amount of employees Smilebit was at 51 right before integration back into Sega in 2004.