Citing the challenging economic climate and changes in the video game market in the U.S. and Europe, Sega Sammy this morning said it expects Sega's operating losses for the previous year to reach into the billions of yen and that they need to cancel game development and shrink the company.

Reeling from an expected 7.1 billion yen loss, Sega Sammy officials say they need to "streamline organizations in the field of video game software in the U.S. and Europe." That means a significant cut in games under development, shifting to the digital market and a high likelihood of layoffs.

The measures outlined in an early morning press release are significant, though not very specific. They include creating a smaller company positioned for sustained profitability and narrowing the sale of titles down to its strong franchises like Sonic the Hedgehog, Football Manager, Total War and Aliens.

Sega is narrowing the sale of titles down to its strong franchises like Sonic the Hedgehog, Football Manager, Total War and Aliens.

Sega is canceling the development of some games, but the company hasn't yet said which. It sounds like the one-time giant is in the process of looking over its games and figuring out which ones can still make money and which ones should be cut to save costs.

Sega's current announced games in development include Binary Domain (for Windows), London 2012, Virtua Fighter 5: Final Showdown, Jet Set Radio, Sonic the Hedgehog 4: Episode 2, Anarchy Reins, Aliens: Colonial Marines, Phantasy Star Online 2, Super Monkey Ball: Banana Splitz, Doctor Who: The Adventure Games, Yakuza 5, and Hell Yeah! Wrath of the Dead Rabbit.

Sega became a subsidiary of Sammy in 2004, creating the company Sega Sammy Holdings. That parent company reports that while Sega was hit by staggering losses in its fiscal year ending March 2012, the company as a whole will see a projected net income of 20.0 billion yen. Much of that profit comes from the company's successful Pachislot and Pachinko Machines Business, Amusement Machine Business and Amusement Center Operations Business.