Sega AM2 is definitely working on Shenmue III, according to reports. Speculation has surrounded the future of the series ever since the sequel was released on Dreamcast, with reports that Yu Suzuki had already written the script, and speculation that AM2 might instead release a DVD to finalise the story, but at the moment all we know is that the game is in development. No specifics of the storyline, platform or release date have been mentioned, but we should apparently know more in September.
Back in January, Shin Ishikawa, the man responsible for porting Shenmue II to the Xbox, intimated in an interview that the next game in the series - unconfirmed at the time - would be released on Xbox, and that the story would continue Ryu's adventure in China. Sega of America offered no comment back then, and nobody's offered any right now either.