UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark
One)





xANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
fiscal year ended: December 31,
2008





oTRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
transition period from ____________ to _____________





Commission
File No. 000-52503





ILLUSION DIGITAL
SYSTEMS, INC.





(Name of
registrant as specified in its charter)





Colorado
            ----------------------(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





9595
Wilshire Blvd., Suite 900


Beverly
Hills, CA 92012





(Address
of Principal Executive Offices)





877-565-0515





(Registrant’s
Telephone Number, Including Area Code)





Securities
registered pursuant to Section 12(b) of the Exchange Act:




Title of each class
            
            Name of each exchange on which
      registeredNone
            
            None





Securities
registered pursuant to Section 12(g) of the Exchange Act: common stock, par
value $.001 per share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes  ̈ No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes  ̈ No x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.Yes x No  ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.








Large
      Accelerated Filer  o
            Accelerated
      Filer oNon-Accelerated
      Filer o(Do
      not check if a smaller reporting company)
            Smaller
      reporting company o




Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of
the Act).Yes o No o




As of
June 30, 2008 (the last business day of the registrant’s most recently completed
second fiscal quarter), the aggregate market value of the shares of the
Registrant’s common stock held by non-affiliates (based upon the closing price
of such shares as quoted on the Electronic Bulletin Board maintained by the
National Association of Securities Dealers, Inc.) could not be
determined.




There
were a total of 1,390,000shares of the registrant’s common stock outstanding as of March 30,
2009.









Documents
Incorporated by Reference:





None.









TABLE
OF CONTENTS







PART
I




ITEM
      1.
            BUSINESS.
            1ITEM
      1A.
            RISK
      FACTORS.
            6ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS.
            10ITEM
      2.
            PROPERTIES.
            11ITEM
      3.
            LEGAL
      PROCEEDINGS.
            11ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.
            11PART
      IIITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.
            11ITEM
      6.
            SELECTED
      FINANCIAL DATA.
            12ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
            12ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
            15ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.
            15ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
            15ITEM
      9A(T)
            CONTROLS
      AND PROCEDURES.
            15ITEM
      9B.
            OTHER
      INFORMATION.
            16PART
      IIIITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
            17ITEM
      11.
            EXECUTIVE
      COMPENSATION.
            18ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
            18ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.
            18ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
            19PART
      IVITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.
            20









INTRODUCTORY
COMMENTS





Special
Note Regarding Forward Looking Statements





This annual report on Form 10-K, including the
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  Such statements include,
among others, those concerning our expected financial performance and strategic
and operational plans, as well as all assumptions, expectations, predictions,
intentions or beliefs about future events.  You are cautioned that any
such forward-looking statements are not guarantees of future performance and
that a number of risks and uncertainties could cause actual results of the
Company to differ materially from those anticipated, expressed or implied in the
forward-looking statements.  The words “believe,” “expect,”
“anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or
similar expressions are intended to identify forward-looking
statements.  All statements other than statements of historical fact
are statements that could be deemed forward-looking statements.  Risks
and uncertainties that could cause actual results to differ materially from
those anticipated are discussed in Item 1A. “Risk
Factors.”





Readers
are urged to carefully review and consider the various disclosures made by us in
this report and our other filings with the SEC.  These reports attempt
to advise interested parties of the risks and factors that may affect our
business, financial condition and results of operations and
prospects.  The forward-looking statements made in this Report speak
only as of the date hereof and we disclaim any obligation to provide updates,
revisions or amendments to any forward-looking statements to reflect changes in
our expectations or future events.





Use
of Terms





Except as
otherwise indicated by the context, all references in this annual report to (i)
the “Company,” “we,” “us” and “our” are to Illusion Digital Systems, Inc. a
Colorado corporation; (ii) “SEC” are to the Securities and Exchange Commission;
(iii) “Securities Act” are to the Securities Act of 1933, as amended; (iv)
“Exchange Act” are to the Securities Exchange Act of 1934, as amended; and (v)
“U.S. dollar,” “$” and “US$” are to the legal currency of the United States.





PART
I




ITEM
      1.
            BUSINESS.





Our
History and Background





We were
incorporated in the State of Colorado on February 16, 2007 under the name Lexit
Technology, Inc.  The company changed its name to Illusion Digital
Systems, Inc on August 14, 2008. Since inception, we have been engaged in
organizational efforts and obtaining initial financing. We were formed as a
vehicle to pursue a business combination through the acquisition of, or merger
with, an operating business. Since the effectiveness of our registration
statement on Form 10-SB, we have focused our efforts on identifying a possible
business combination.





Overview
of Our Business





We are
currently a shell company that intends to enter into a business combination with
one or more privately held businesses. Management believes that we will be
attractive to privately held operating companies interested in becoming publicly
traded by means of a business combination with us, without offering their own
securities to the public. We will not be restricted in our search for business
combination candidates to any particular geographical area, industry or industry
segment, and may enter into a combination with a private business engaged in any
line of business. Management’s discretion is, as a practical matter, unlimited
in the selection of a combination candidate.





If we
effect a business combination with any entity unaffiliated with our current
management, our current officers and directors probably will resign their
directorships and officer positions with us in connection with our consummation
of a business combination (see “Form of Acquisition” below). In such an
instance, our current management will not have any control over the conduct of
our business following the completion of a business combination.




1





It is
anticipated that prospective business opportunities will come to our attention
from various sources, including our management, professional advisors such as
attorneys and accountants, securities broker-dealers, venture capitalists,
members of the financial community, and others who may present unsolicited
proposals. There are no plans to use advertisements, notices or any general
solicitation in the search for combination candidates.





Pre-Combination
Activities





We are a
“blank check” company, defined as an inactive, public company with nominal
assets and liabilities. With these characteristics, management believes that we
will be attractive to privately held companies interested in becoming publicly
traded by means of a business combination with us, without offering their own
securities to the public. The term “business combination” (or “combination”)
means the result of (i) a statutory merger of a combination candidate into or
its consolidation with us or our wholly owned subsidiary that would be formed
for the purpose of the merger or consolidation, (ii) the exchange of our
securities for the assets or outstanding equity securities of a privately held
business, or (iii) the sale of securities by us for cash or other value to a
business entity or individual, and similar transactions.





A combination may be structured in one of the foregoing ways or in
any other form which will result in the combined entity being a publicly held
corporation. It is unlikely that any proposed combination will be submitted for
the approval of our stockholders prior to consummation. Pending negotiation and
consummation of a combination, we anticipate that we will have no business
activities or sources of revenues and will incur no significant expenses or
liabilities other than expenses related to ongoing filings required by the
Exchange Act, or related to the negotiation and consummation of a
combination.





We will
not be restricted in our search for business combination candidates to any
particular geographical area, industry or industry segment, and may enter into a
combination with a private business engaged in any line of business, including
service, finance, mining, manufacturing, real estate, oil and gas, distribution,
transportation, medical, communications, high technology, biotechnology or any
other. Management’s discretion is, as a practical matter, unlimited in the
selection of a combination candidate. Our management will seek combination
candidates in the United States and other countries, as available time permits,
through existing associations and by word of mouth.





There is
no assurance that we will be successful in locating a suitable combination
candidate or in concluding a business combination on terms acceptable to us. Our
board of directors has not established a time limitation by which we must
consummate a suitable combination; however, if we are unable to consummate a
suitable combination within a reasonable period, such period to be determined at
the discretion of our board of directors, the board of directors will probably
recommend that we liquidate and dissolve. It is anticipated that we will not be
able to diversify, but will essentially be limited to one such venture because
of our lack of capital. This lack of diversification will not permit us to
offset potential losses from one acquisition against profits from another, and
should be considered an adverse factor affecting any decision to purchase our
securities.





Our board
of directors has the authority and discretion to complete certain combinations
without submitting them to the stockholders for their prior approval. Our
stockholders should not anticipate that they will have any meaningful
opportunity to consider or vote upon any candidate selected by our management
for acquisition. Generally, the prior approval of our stockholders will be
required for any statutory merger of us with or into another company, but
stockholder approval will not be required if the following requirements are met:
(1) our certificate of incorporation will not change as a result of the merger;
and (2) following the merger, each person who was our stockholder immediately
prior to the merger will on the effective date of the merger continue to hold
the same number of shares, with identical designations, preferences, limitations
and relative rights. Stockholder approval also will not be required as to any
“short-form merger,” meaning the merger into us of a company in which we already
own 90% or more of the equity securities. Moreover, in the event that a business
combination occurs in the form of a stock-for-stock exchange or the issuance of
stock to purchase assets, the approval of our stockholders will not be required
by law so long as we acquire the shares or assets of the other
company.





Combination
Suitability Standards





The
analysis of new business opportunities has and will be undertaken by or under
the supervision of our management.  To a large extent, a decision to
participate in a specific combination may be made upon management’s analysis of
the quality of the candidate company’s management and personnel, the anticipated
acceptability of new products or marketing concepts, the merit of technological
changes, the perceived benefit the candidate will derive from becoming a
publicly held entity, and numerous other factors which are difficult, if not
impossible, to objectively quantify or analyze. In many instances, it is
anticipated that the historical operations of a specific candidate may not
necessarily be indicative of the potential for the future because of the
possible need to shift marketing approaches substantially, expand significantly,
change product emphasis, change or substantially augment management, or make
other changes. We will be dependent upon the owners and management of a
candidate to identify any such problems which may exist and to implement, or be
primarily responsible for the implementation of, required changes. Because we
may participate in a business combination with a newly organized candidate or
with a candidate which is entering a new phase of growth, it should be
emphasized that we will incur further risks, because management in many
instances will not have proved its abilities or effectiveness, the eventual
market for the candidate's products or services will likely not be established,
and the candidate may not be profitable when acquired.




2





Otherwise, we anticipate that we may consider, among other things,
the following factors:





·
            Potential
      for growth, indicated by new technology, anticipated market expansion or
      new products;




·
            Competitive
      position as compared to other firms of similar size and experience within
      the industry segment as well as within the industry as a
      whole;




·
            Strength
      and diversity of management, either in place or scheduled for
      recruitment;




·
            Capital
      requirements and anticipated availability of required funds, to be
      provided by us or from operations, through the sale of additional
      securities, through joint ventures or similar arrangements or from other
      sources;




·
            The
      cost of participation by us as compared to the perceived tangible and
      intangible values and potentials;




·
            The
      extent to which the business opportunity can be
  advanced;




·
            The
      accessibility of required management expertise, personnel, raw materials,
      services, professional assistance and other required items;
      and




·
            Other
      relevant factors.




No one of
the factors described above will be controlling in the selection of a candidate.
Potentially available candidates may occur in many different industries and at
various stages of development, all of which will make the task of comparative
investigation and analysis of such business opportunities extremely difficult
and complex. It should be recognized that, because of our limited capital
available for investigation, we may not discover or adequately evaluate adverse
facts about the opportunity to be acquired. We cannot predict when we may
participate in a business combination. We expect, however, that the analysis of
specific proposals and the selection of a candidate may take several months or
more.





Form of Acquisition





It is
likely that we will acquire our participation in a business opportunity through
the issuance of common stock or other of our securities. Although the terms of
any such transaction cannot be predicted, it should be noted that in certain
circumstances the criteria for determining whether or not an acquisition is a
so-called “tax free” reorganization under the Internal Revenue Code of 1986,
depends upon the issuance to the stockholders of the acquired company of a
controlling interest (i.e. 80% or more) of the common stock of the combined
entities immediately following the reorganization. If a transaction were
structured to take advantage of these provisions rather than other “tax free”
provisions provided under the Internal Revenue Code, our current stockholders
would retain in the aggregate 20% or less of the total issued and outstanding
shares. This could result in substantial additional dilution in the equity of
those who were our stockholders prior to such reorganization. Any such issuance
of additional shares might also be done simultaneously with a sale or transfer
of shares representing a controlling interest in us by the current officers,
directors and principal stockholders.





It is
anticipated that any new securities issued in any reorganization would be issued
in reliance upon exemptions, if any are available, from registration under
applicable federal and state securities laws. In some circumstances, however, as
a negotiated element of the transaction, we may agree to register such
securities either at the time the transaction is consummated, or under certain
conditions or at specified times thereafter. The issuance of substantial
additional securities and their potential sale into any trading market that
might develop in our securities may have a depressive effect upon such
market.




3





We will
participate in a business opportunity only after the negotiation and execution
of a written agreement. Although the terms of such agreement cannot be
predicted, generally such an agreement would require specific representations
and warranties by all of the parties thereto, specify certain events of default,
detail the terms of closing and the conditions which must be satisfied by each
of the parties thereto prior to such closing, outline the manner of bearing
costs if the transaction is not closed, set forth remedies upon default, and
include miscellaneous other terms.





It is anticipated that the investigation of specific business
opportunities and the negotiation, drafting and execution of relevant
agreements, disclosure documents and other instruments will require substantial
management time and attention and substantial costs for accountants, attorneys
and others. If a decision is made not to participate in a specific business
opportunity, the costs theretofore incurred in the related investigation would
not be recoverable. Moreover, because many providers of goods and services
require compensation at the time or soon after the goods and services are
provided, our inability to pay until an indeterminate future time may make it
impossible to procure goods and services.





Post
Combination Activities





Management
anticipates that, following consummation of a combination, control of us will
change as a result of the issuance of additional common stock to the
stockholders of the business acquired in the combination. Once ownership control
has changed, it is likely that the new controlling stockholders will call a
meeting for the purpose of replacing our incumbent directors with candidates of
their own, and that the new directors will then replace the incumbent officers
with their own nominees. Rule 14f-1 under the Exchange Act requires that, if in
connection with a business combination or sale of our control there should arise
any arrangement or understanding for a change in a majority of our directors and
the change in the board of directors is not approved in advance by our
stockholders at a stockholder meeting, then none of the new directors may take
office until at least ten (10) days after an information statement has been
filed with the SEC and sent to our stockholders. The information statement
furnished must as a practical matter include the information required by Items
6(a), (d) and (e), 7 and 8 of Schedule 14A of Regulation 14A in a proxy
statement.





Following
consummation of a combination, management anticipates that we will file a
current report on Form 8-K with the Commission which discloses among other
things the date and manner of the combination, material terms of the definitive
agreement, the assets and consideration involved, the identity of the person or
persons from whom the assets or other property was acquired, changes in
management and biographies of the new directors and executive officers, identity
of principal stockholders following the combination, and contains the required
financial statements. Such a Form 8-K report also will be required to include
all information that is required to be disclosed under a Form 10 relating to the
target company.





Use
of Consultants and Finders





Our
management might hire and pay an outside consultant to assist in the
investigation and selection of candidates, and might pay a finder’s fee to a
person who introduces a candidate with which we complete a combination. Since
our management has no current plans to use any outside consultants or finders to
assist in the investigation and selection of candidates, no policies have been
adopted regarding use of consultants or finders, the criteria to be used in
selecting such consultants or finders, the services to be provided, the term of
service, or the structure or amount of fees that may be paid to them. However,
because of our limited resources, it is likely that any such fee we agree to pay
would be paid in stock and not in cash.





It is
possible that compensation in the form of common stock, options, warrants or
other of our securities, cash or any combination thereof, may be paid to outside
consultants or finders. None of our securities will be paid to our officers,
directors or promoters or any of their respective affiliates in the form of
finder’s fees. Any payments of cash to a consultant or finder would be made by
the business acquired or persons affiliated or associated with it, and not by
us. It is possible that the payment of such compensation may become a factor in
any negotiations for our acquisition of a business opportunity. Any such
negotiations and compensation may present conflicts of interest between the
interests of persons seeking compensation and those of our stockholders, and
there is no assurance that any such conflicts will be resolved in favor of our
stockholders.





State
Securities Laws and Considerations





Section
18 of the Securities Act provides that no law, rule, regulation, order or
administrative action of any state may require registration or qualification of
securities or securities transactions that involve the sale of a “covered
security”. The term “covered security” is defined in Section 18 to include among
other things transactions by “any person not an issuer, underwriter or dealer”,
(in other words, secondary transactions in securities already outstanding) that
are exempted from registration by Section 4(1) of the Securities Act, provided
the issuer of the security is a “reporting company,” meaning that it files
reports with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act.




4





Section 18 preserves the authority of the states to require certain
limited notice filings by issuers and to collect fees as to certain categories
of covered securities, specifically including Section 4(1) secondary
transactions in the securities of reporting companies. Section 18 expressly
provides, however, that a state may not “directly or indirectly prohibit, limit,
or impose conditions based on the merits of such offering or issuer, upon the
offer or sale of any (covered) security.” This provision prohibits states from
requiring registration or qualification of securities of an Exchange Act
reporting company which is current in its filings with the SEC.





The
states generally are free to enact legislation or adopt rules that prohibit
secondary trading in the securities of “blank check” companies like us. Section
18 of the Securities Act, however, preempts state law as to covered securities
of reporting companies. Thus, while the states may require certain limited
notice filings and payment of filing fees by us as a precondition to secondary
trading of our shares in those states, they cannot, so long as we are a
reporting issuer, prohibit, limit or condition trading of our securities based
on the fact that we are or ever were a blank check company. We will comply with
such state limited notice filings as may be necessary in regard to secondary
trading. At this time, our stock is not actively traded in any market, and an
active market in our common stock is not expected to arise, if ever, until after
completion of a business combination.





No
Investment Company Act Regulation





Prior to
completing a combination, we will not engage in the business of investing or
reinvesting in, or owning, holding or trading in securities, or otherwise
engaging in activities which would cause us to be classified as an “investment
company” under the Investment Company Act of 1940, as amended, or the Investment
Company Act. To avoid becoming an investment company, not more than 40% of the
value of our assets (excluding government securities and cash and cash
equivalents) may consist of “investment securities”, which is defined to include
all securities other than U.S. government securities and securities of
majority-owned subsidiaries. Because we will not own less than a majority of any
assets or business acquired, we will not be regulated as an investment company.
We will not pursue any combination unless it will result in our owning at least
a majority interest in the business acquired.





Recent
Developments





On
February 20, 2008, the Registrant terminated the Asset Purchase Agreement with
SmartWear Technologies,
Inc, dated November 6, 2007, among the Registrant and SmartWear Technologies,
Inc. The terms of
the Agreement were previously disclosed by the Registrant on Form 8-K filed with
the Securities and Exchange Commission on November 8, 2007.





The
termination of the agreement was authorized by Section 10.1 (a) of the Agreement
“by mutual consent of Lexit and SWT”. The Registrant and SmartWear Technologies
mutually agreed to the termination of the Agreement.




Competition





We face
vast competition from other shell companies with the same objectives. We are in
a highly competitive market for a small number of business opportunities which
could reduce the likelihood of consummating a successful business combination. A
large number of established and well-financed entities, including small public
companies and venture capital firms, are active in mergers and acquisitions of
companies that may be desirable target candidates for us. Nearly all these
entities have significantly greater financial resources, technical expertise and
managerial capabilities than we do; consequently, we will be at a competitive
disadvantage in identifying possible business opportunities and successfully
completing a business combination. These competitive factors may reduce the
likelihood of our identifying and consummating a successful business
combination.





Employees





We have
no employees other than our sole officer who devotes only a limited amount of
time to our business.




5





ITEM 1A.
            RISK
      FACTORS.





You
should carefully review and consider the following risks as well as all other
information contained in this report, including our financial statements and the
notes to those statements. The following risks and uncertainties are not the
only ones facing us. Additional risks and uncertainties of which we are
currently unaware or which we believe are not material also could materially
adversely affect our business, financial condition, results of operations, or
cash flows. To the extent any of the information contained in this annual report
constitutes forward-looking information, the risk factors set forth below are
cautionary statements identifying important factors that could cause our actual
results for various financial reporting periods to differ materially from
those expressed in any forward-looking statements made by or on our behalf and
could materially adversely effect our financial condition, results of operations
or cash flows.





There
may be conflicts of interest as a result of our management being involved with
other blank check shell companies which may result in decisions that are adverse
to our business.





Conflicts
of interest and non-arms length transactions may arise in the future. Conflicts
of interest create the risk that management may have an incentive to act
adversely to the interests of the Company. The terms of a business combination
may include terms like the retention of our current officers and directors as
officers and directors of the successor company in the business combination. The
terms of a business combination may provide for a payment by cash or otherwise
to members of our management team for the purchase or retirement of all or part
of our common stock that is held by them or for services rendered incident to or
following a business combination. Our management team would directly benefit
from this type of employment or payment. These benefits may influence our
management team's choice of a target company. Our certificate of incorporation
provides that we may indemnify our officers and/or directors for liabilities,
which can include liabilities arising under the securities
laws.  Therefore, our assets could be used or attached to satisfy any
liabilities subject to this indemnification.





Our
management is currently or in the future may become, involved with other blank
check shell companies, and in our pursuit of business combinations, conflicts
with such other companies may arise.  If we desire to take advantage
of the same opportunities as such other blank check shell companies, then those
members of management that are affiliated with both companies would abstain from
voting upon the opportunity.  In the event of identical officers and
directors, the officers and directors will arbitrarily determine which company
will be entitled to proceed with the proposed transaction. These conflicts may
result in management decisions that could negatively affect our operations and
potentially result in the loss of opportunities.





We have a limited operating
historyand no revenues
or earnings from operations.





We have a
limited operating history and no revenues or earnings from operations since
inception. We have no significant assets or financial resources. We will, in all
likelihood, sustain operating expenses without corresponding revenues, at least
until the consummation of a merger or other business combination with a private
company. This may result in our incurring a net operating loss that will
increase unless we consummate a business combination with a profitable business.
We cannot assure you that we can identify a suitable business opportunity and
consummate a business combination, or that any such business will be profitable
at the time of its acquisition by us or ever.





Since our
inception on February 16, 2007 through December 31, 2008, we have incurred a net
loss of $(6,500).  We expect that we will incur losses at least until
we complete a merger or other business combination with an operating business
and perhaps after such a combination as well. There can be no assurance that we
will complete a merger or other business combination with an operating business
or that we will ever be profitable.





We
face a number of risks associated with potential acquisitions.





We intend
to use reasonable efforts to complete a merger or other business combination
with an operating business. Such combination will be accompanied by risks
commonly encountered in acquisitions, including, but not limited to,
difficulties in integrating the operations, technologies, products and personnel
of the acquired companies and insufficient revenues to offset increased expenses
associated with acquisitions. Failure to manage and successfully integrate
acquisitions we make could harm our business, our strategy and our operating
results in a material way.




6





There
is competition for those private companies suitable for a merger transaction of
the type contemplated by management.





We are in
a highly competitive market for a small number of business opportunities which
could reduce the likelihood of consummating a successful business combination.
We are, and will continue to be, an insignificant participant in the business of
seeking mergers with, joint ventures with and acquisitions of small private and
public entities. A large number of established and well-financed entities,
including small public companies and venture capital firms, are active in
mergers and acquisitions of companies that may be desirable target candidates
for us. Nearly all these entities have significantly greater financial
resources, technical expertise and managerial capabilities than we do;
consequently, we will be at a competitive disadvantage in identifying possible
business opportunities and successfully completing a business combination. These
competitive factors may reduce the likelihood of our identifying and
consummating a successful business combination.





Our
proposed operations are purely speculative. Future success is highly dependent
on the ability of management to locate and attract a suitable acquisition. There
can be no assurance that we will successfully consummate a business
combination.





The
nature of our operations is highly speculative, and there is a consequent risk
of loss of your investment. The success of our plan of operation will depend to
a great extent on the operations, financial condition and management of the
identified business opportunity. While management intends to seek business
combination(s) with entities having established operating histories, we cannot
assure you that we will be successful in locating candidates meeting these
criteria. In the event we complete a business combination, the success of our
proposed plan of operation will depend to a great extent on the operations,
financial condition and management of the identified target company and numerous
other factors beyond our control. We can give no assurances that we will
successfully identify and evaluate suitable business opportunities, negotiate a
business combination on favorable terms, or that we will conclude a business
combination.





Our
management team does not devote its full time to our business and operations
which may adversely impact our ability to identify a suitable acquisition
candidate.




Our
officers and directors, who serve only on a part-time basis, have had limited
experience in the business activities contemplated by us, yet we will be solely
dependent on them. We lack the funds or other incentive to hire full-time
experienced management. Each of our management members has other employment or
business interests to which he devotes his primary attention and will continue
to do so, devoting time to us only on an as-needed basis. This limited
commitment may adversely impact our ability to identify and consummate a
successful business combination.





The
time and cost of preparing a private company to become a public reporting
company may preclude us from entering into a merger or acquisition with the most
attractive private companies.





Target
companies that fail to comply with SEC reporting requirements may delay or
preclude acquisition. Sections 13 and 15(d) of the Exchange Act require
reporting companies to provide certain information about significant
acquisitions, including certified financial statements for the company acquired,
covering one, two, or three years, depending on the relative size of the
acquisition. The time and additional costs that may be incurred by some target
entities to prepare these statements may significantly delay or essentially
preclude consummation of an acquisition. Otherwise suitable acquisition
prospects that do not have or are unable to obtain the required audited
statements may be inappropriate for acquisition so long as the reporting
requirements of the Exchange Act are applicable.





We
may be subject to further government regulation which would adversely affect our
operations.





Although
we are subject to the reporting requirements under the Exchange Act, management
believes we are not subject to regulation under the Investment Company Act since
we are not engaged in the business of investing or trading in securities. If we
engage in business combinations which result in our holding passive investment
interests in a number of entities, we could be subject to regulation under the
Investment Company Act. If so, we would be required to register as an investment
company and could be expected to incur significant registration and compliance
costs. We have obtained no formal determination from the SEC as to our status
under the Investment Company Act and, consequently, violation of the Investment
Company Act could subject us to material adverse consequences.




7





Any
potential acquisition or merger with a foreign company may subject us to
additional risks.





If we
enter into a business combination with a foreign company, we will be subject to
risks inherent in business operations outside of the United States. These risks
include, for example, currency fluctuations, regulatory problems, punitive
tariffs, unstable local tax policies, trade embargoes, risks related to shipment
of raw materials and finished goods across national borders and cultural and
language differences. Foreign economies may differ favorably or unfavorably from
the United States economy in growth of gross national product, rate of
inflation, market development, rate of savings, and capital investment, resource
self-sufficiency and balance of payments positions, and in other
respects.





We
may be subject to certain tax consequences in our business, which may increase
our cost of doing business.





Federal
and state tax consequences will, in all likelihood, be major considerations in
any business combination that we may undertake. We may not be able to structure
our acquisition to result in tax-free treatment for the companies or their
stockholders, which could deter third parties from entering into certain
business combinations with us or result in being taxed on consideration received
in a transaction. Currently, a transaction may be structured so as to result in
tax-free treatment to both companies, as prescribed by various federal and state
tax provisions. We intend to structure any business combination so as to
minimize the federal and state tax consequences to both us and the target
entity; however, we cannot guarantee that the business combination will meet the
statutory requirements of a tax-free reorganization or that the parties will
obtain the intended tax-free treatment upon a transfer of stock or assets. A
non-qualifying reorganization could result in the imposition of both federal and
state taxes that may have an adverse effect on both parties to the
transaction.





Because
we may seek to complete a business combination through a “reverse merger,”
following such a transaction we may not be able to attract the attention of
major brokerage firms.





Additional
risks may exist since we expect to assist a privately held business to become
public through a “reverse merger.” Securities analysts of major brokerage firms
may not provide coverage of our Company since there is no incentive to brokerage
firms to recommend the purchase of our common stock. No assurance can be given
that brokerage firms will want to conduct any secondary offerings on behalf of
our post-merger company in the future.








There
is not now, and there may not ever be, an active market for our common stock and
we cannot assure you that the common stock will become liquid or that it will be
listed on a securities exchange





There
currently is no market for our common stock. We plan to list our common stock as
soon as practicable. However, we cannot assure you that we will be able to meet
the initial listing standards of any stock exchange, or that we will be able to
maintain any such listing.  In this venue, however, an investor may find it
difficult to obtain accurate quotations as to the market value of the common
stock and trading of our common stock may be extremely sporadic. For example,
several days may pass before any shares may be traded. A more active market for
the common stock may never develop. In addition, if we failed to meet the
criteria set forth in SEC regulations, various requirements would be imposed by
law on broker-dealers who sell our securities to persons other than established
customers and accredited investors. Consequently, such regulations may deter
broker-dealers from recommending or selling the common stock, which may further
affect its liquidity. This would also make it more difficult for us to raise
additional capital.





We
cannot assure you that following a business combination with an operating
business, our common stock will be listed on NASDAQ or any other securities
exchange; and if listed we may be subject to penny stock rules.




Following
a business combination, we may seek the listing of our common stock on NASDAQ or
the American Stock Exchange. However, we cannot assure you that following such a
transaction, we will be able to meet the initial listing standards of either of
those or any other stock exchange, or that we will be able to maintain a listing
of common stock on either of those or any other stock exchange. After completing
a business combination, until our common stock is listed on the NASDAQ or
another stock exchange, we expect that our common stock would be eligible to
trade on the OTC Bulletin Board, another over-the-counter quotation system, or
on the “pink sheets,” where our stockholders may find it more difficult to
dispose of shares or obtain accurate quotations as to the market value of our
common stock.




8





In
addition, after such listing, our securities may be classified as penny stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a "penny
stock," for purposes relevant to us, as any equity security that has a market
price of less than $5.00 per share or with an exercise price of less than $5.00
per share whose securities are admitted to quotation but do not trade on the
Nasdaq Capital Market or on a national securities exchange. For any transaction
involving a penny stock, unless exempt, the rules require delivery of a document
to investors stating the risks, special suitability inquiry, regular reporting
and other requirements. Prices for penny stocks are often not available and
investors are often unable to sell this stock. Consequently, such rule may deter
broker-dealers from recommending or selling our common stock, which may further
affect its liquidity. This would also make it more difficult for us to raise
additional capital following a business combination.




All
our issued and outstanding capital stock is owned and controlled by AL
Kennedy.





Our sole
director and officer and controlling stockholder, AL Kennedy, currently owns all
of our issued and outstanding capital stock, and therefore controls our
operations and will have the ability to control all matters submitted to
stockholders for approval, including:




·
            election
      of our board of directors;




·
            removal
      of any directors;




·
            amendment
      of our Certificate of Incorporation or Bylaws;
  and




·
            adoption
      of measures that could delay or prevent a change in control or impede a
      merger, takeover or other business
combination.




This
stockholder thus has complete control over our management and affairs.
Accordingly, his ownership may have the effect of impeding a merger,
consolidation, takeover or other business consolidation, or discouraging a
potential acquirer from making a tender offer for our common stock, which may
further affect its liquidity.





Our
sole stockholder may have a minority interest in the Company following a merger
or other business combination with an operating business.





If we
consummate a merger or business combination with a company with a value in
excess of the value of our Company and issue shares of common stock to the
stockholders of such company as consideration for merging with us, our sole
stockholder would own less than 50% of the Company after the business
combination. The stockholders of the acquired company would therefore be able to
control the election of our board of directors and control our
Company.





We
have never paid dividends on our common stock.





We have
never paid dividends on our common stock and do not presently intend to pay any
dividends in the foreseeable future. We anticipate that any funds available for
payment of dividends will be re-invested into the Company to further its
business strategy.





We
intend to issue more shares in a merger or acquisition, which will result in
substantial dilution.





Our
Certificate of Incorporation authorizes the issuance of a maximum of
100,000,000 shares of common stock. Any merger or acquisition effected by
us may result in the issuance of additional securities without stockholder
approval and the substantial dilution in the percentage of common stock held by
our then existing stockholders. Moreover, the common stock issued in any such
merger or acquisition transaction may be valued on an arbitrary or
non-arm’s-length basis by our management, resulting in an additional reduction
in the percentage of common stock held by our current stockholder. Our board of
directors has the power to issue any or all of such authorized but unissued
shares without stockholder approval. To the extent that additional shares of
common stock or preferred stock are issued in connection with a business
combination or otherwise, dilution to the interests of our stockholder will
occur and the rights of the holder of common stock might be materially and
adversely affected.




9





There are issues impacting liquidity of
our securities with respect to the SEC’s review of a future resale registration
statement.





Since
shares of our common stock issued prior to a business combination or reverse
merger cannot currently, nor will they for a considerable period of time after
we complete a business combination, be available to be offered, sold, pledged or
otherwise transferred without being registered pursuant to the Securities Act,
we will likely file a resale registration statement on Form S-1, or some other
available form, to register for resale such shares of our common stock. We
cannot control this future registration process in all respects as some matters
are outside our control. Even if we are successful in causing the effectiveness
of the resale registration statement, there can be no assurances that the
occurrence of subsequent events may not preclude our ability to maintain the
effectiveness of the registration statement. Any of the foregoing items could
have adverse effects on the liquidity of our shares of our common
stock.




In
addition, the SEC has recently disclosed that it has developed internal informal
guidelines concerning the use of a resale registration statement to register the
securities issued to certain investors in private investment in public equity
(PIPE) transactions, where the issuer has a market capitalization of less than
$75 million and, in general, does not qualify to file a Registration Statement
on Form S-3 to register its securities.  The SEC has taken the
position that these smaller issuers may not be able to rely on Rule 415 under
the Securities Act, or Rule 415, which generally permits the offer and sale of
securities on a continued or delayed basis over a period of time, but instead
would require that the issuer offer and sell such securities in a direct or
“primary” public offering, at a fixed price, if the facts and circumstances are
such that the SEC believes the investors seeking to have their shares registered
are underwriters and/or affiliates of the issuer. It appears that the SEC in
most cases will permit a registration for resale of up to one third of the total
number of shares of common stock then currently owned by persons who are not
affiliates of such issuer and, in some cases, a larger percentage depending on
the facts and circumstances. Staff members also have indicated that an issuer in
most cases will have to wait until the later of six months after effectiveness
of the first registration or such time as substantially all securities
registered in the first registration are sold before filing a subsequent
registration on behalf of the same investors. Since, following a reverse merger
or business combination, we may have little or no tradable shares of common
stock, it is unclear as to how many, if any, shares of common stock the SEC will
permit us to register for resale, but SEC staff members have indicated a
willingness to consider a higher percentage in connection with registrations
following reverse mergers with shell companies such as the Company. The SEC may
require as a condition to the declaration of effectiveness of a resale
registration statement that we reduce or “cut back” the number of shares of
common stock to be registered in such registration statement. The result of the
foregoing is that a stockholder’s liquidity in common stock may be adversely
affected in the event the SEC requires a cut back of the securities as a
condition to allow us to rely on Rule 415 with respect to a resale registration
statement, or, if the SEC requires us to file a primary registration
statement.





In order to grow at the pace expected by
management, we will require additional capital to support our long-term business
plan. If we are unable to obtain additional capital in future years, we may be unable to proceed
with our long-term business plan and we may be forced to curtail or cease our
operation or further business expansion.





We will require additional working
capital to support our long-term business plan, which includesidentifying suitable targets for
horizontal or vertical mergers or acquisitions, so as to enhance the overall
productivity and benefit from economies of scale.After a suitable business combination,
our working capital
requirements and the cash flow provided by future operating activities, if any,
will vary greatly from quarter to quarter, depending on the volume of business
during the period and payment terms with our customers.Due to the current global financial crisis, we may not be able
to obtain adequate levels of additional financing, whether through equity
financing, debt financing or other sources.To raise funds, we may need
to issue new equities or bonds which could result in additional dilution to our
shareholders, and additional
financings could result in significant dilution to our earnings per share or the
issuance of securities with rights superior to our current outstanding
securities or contain covenants that would restrict our operations and
strategy.  In addition,
we may grant registration rights to investors purchasing our equity or debt
securities in the future. If we are unable to raise additional financing, we may
be unable to implement our long-term business plan, develop or enhancenewproducts and services, take advantage
of future opportunities or respond to competitive pressures on a timely basis, if at
all.In addition, a lack of
additional financing could force us to substantially curtail or cease
operations.The
current global credit crisis is making it difficult, if not impossible, for
companies to obtain financing for acquisitions and operational growth. There is
no indication when this credit crisis will abate. Accordingly, we cannot assure
you that we will be able to obtain such third party financing on terms favorable
to us or at all.The
current global credit crisis is making it difficult, if not impossible, for
companies to obtain financing for acquisitions and operational growth. There is
no indication when this credit crisis will abate. Accordingly, we cannot assure
you that we will be able to obtain such third party financing on terms favorable
to us or at all.





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS.





Not
Applicable.




10





ITEM
      2.
            PROPERTIES.





We
neither rent nor own any properties. We utilize the office space and equipment
of our sole officer and director at no cost. Management estimates such amounts
to be immaterial. We currently have no policy with respect to investments or
interests in real estate, real estate mortgages or securities of, or interests
in, persons primarily engaged in real estate activities.





ITEM
      3.
            LEGAL
      PROCEEDINGS.





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties and an adverse result in these or other matters may arise
from time to time that may harm our business. We are currently not aware of any
such legal proceedings or claims that we believe will have a material adverse
affect on our business, financial condition or operating results.





ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS.





No
matters were submitted during the fourth quarter of our 2008 fiscal year to a
vote of security holders, through the solicitation of proxies or
otherwise.





PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.





Market
Information





There
currently is no market for our common stock. Following a business combination,
we may seek the listing of our common stock on NASDAQ, the American Stock
Exchange or another stock exchange. However, we cannot assure you that we will
be able to meet the initial listing standards of any stock exchange, or that we
will be able to maintain any such listing. Until our common stock is listed on
an exchange, we expect that it would be eligible to be quoted in the
over-the-counter bulletin board maintained by the Financial Industry Regulatory
Authority. In this venue, however, an investor may find it difficult to obtain
accurate quotations as to the market value of the common stock and trading of
our common stock may be extremely sporadic. For example, several days may pass
before any shares may be traded. A more active market for the common stock may
never develop. In addition, if we failed to meet the criteria set forth in SEC
regulations, various requirements would be imposed by law on broker-dealers who
sell our securities to persons other than established customers and accredited
investors. Consequently, such regulations may deter broker-dealers from
recommending or selling the common stock, which may further affect its liquidity
and could make it more difficult for us to raise additional
capital.





Approximate
Number of Holders of Our common stock





As of
March 30, 2009, there was 1 stockholder of record of our common
stock.





Dividends





We have
never declared or paid a cash dividend. Any future decisions regarding dividends
will be made by our board of directors. We currently intend to retain and use
any future earnings for the development and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future. Our board of
directors has complete discretion on whether to pay dividends, subject to the
approval of our stockholders.  Even if our board of directors decides to
pay dividends, the form, frequency and amount will depend upon our future
operations and earnings, capital requirements and surplus, general financial
condition, contractual restrictions and other factors that the board of
directors may deem relevant.




11





Securities
Authorized for Issuance Under Equity Compensation Plans





We do not
have in effect any compensation plans under which our equity securities are
authorized for issuance and we do not have any outstanding stock
options.





Recent
Sales of Unregistered Securities





No sales
of our common stock were made during the fourth quarter of our fiscal year ended
December 31, 2008.





Purchases
of Our Equity Securities





No
repurchases of our common stock were made during the fourth quarter of our
fiscal year ended December 31, 2008.





ITEM
      6.
            SELECTED
      FINANCIAL DATA.





Not
Applicable.





ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





The
following management’s discussion and analysis should be read in conjunction
with our financial statements and the notes thereto and the other financial
information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
information. See “Special Note Regarding Forward Looking Statements” above for
certain information concerning those forward looking statements. Our financial
statements are prepared in U.S. dollars and in accordance with U.S.
GAAP.





Overview
of Our Business





We were
incorporated in the State of Colorado on February 16, 2007 under the name of
Lexit Technology, Inc., and changed our name to Illusion Digital Systems, Inc on
August 14, 2008. Since inception, we have been engaged in organizational efforts
and obtaining initial financing. We were formed as a vehicle to pursue a
business combination through the acquisition of, or merger with, an operating
business. Since the effectiveness of our registration statement on Form 10-SB,
we have focused our efforts on identifying a possible business
combination.





We are
currently a shell company that intends to enter into a business combination with
one or more privately held businesses. Management believes that we will be
attractive to privately held operating companies interested in becoming publicly
traded by means of a business combination with us, without offering their own
securities to the public. We will not be restricted in our search for business
combination candidates to any particular geographical area, industry or industry
segment, and may enter into a combination with a private business engaged in any
line of business. Management’s discretion is, as a practical matter, unlimited
in the selection of a combination candidate.




Plan
of Operation





We have
not realized any revenues from operations since our inception, and our plan of
operation for the next twelve months is to locate a suitable acquisition or
merger candidate and consummate a business combination. We may need additional
cash advances from our stockholder or loans from other parties to pay for
operating expenses until we consummate a merger or business combination with a
privately-held operating company. Although it is currently anticipated that we
can satisfy our cash requirements with additional cash advances or loans from
other parties, if needed, for at least the next twelve months, we can provide no
assurance that we can continue to satisfy our cash requirements for such
period.





Since our
formation on February 16, 2007, our purpose has been to effect a business
combination with an operating business which we believe has significant growth
potential. We are currently considered to be a “blank check” company in as much
as we have no specific business plans, no operations, revenues or employees. We
currently have no definitive agreements or understanding with any prospective
business combination candidates and have not targeted any business for
investigation and evaluation nor are there any assurances that we will find a
suitable business with which to combine. The implementation of our business
objectives is wholly contingent upon a business combination and/or the
successful sale of securities in the Company.




12




As a
result of our limited resources, we expect to effect only a single business
combination. Accordingly, the prospects for our success will be entirely
dependent upon the future performance of a single business. Unlike certain
entities that have the resources to consummate several business combinations or
entities operating in multiple industries or multiple segments of a single
industry, we will not have the resources to diversify our operations or benefit
from the possible spreading of risks or offsetting of losses. A target business
may be dependent upon the development or market acceptance of a single or
limited number of products, processes or services, in which case there will be
an even higher risk that the target business will not prove to be commercially
viable.





Our sole
officer is only required to devote a very limited portion of her time to our
affairs on a part-time or as-needed basis. We expect to use outside consultants,
advisors, attorneys and accountants as necessary, none of which will be hired on
a retainer basis. We do not anticipate hiring any full-time employees so long as
we are seeking and evaluating business opportunities.





We expect
our present management to play no managerial role in the Company following a
merger or business combination. Although we intend to scrutinize closely the
management of a prospective target business in connection with our evaluation of
a business combination with a target business, our assessment of management may
be incorrect. We cannot assure you that we will find a suitable business with
which to combine.




Results
of Operations





We have
not conducted any active operations since inception, except for our efforts to
locate a suitable acquisition or merger transaction. No revenue has been
generated by the Company during such period, and it is unlikely that we will
have any revenues unless we are able to effect an acquisition of or merger with
another operating company, of which there can be no assurance.





Since
inception on February 16, 2007, we had no revenues and incurred a net loss of
$(6,500). All general and administrative expenses of $(6,500) related primarily
to accounting, legal and miscellaneous general and administrative fees that are
applicable to all public companies.





Liquidity
and Capital Resources





We had no
cash on hand at December 31, 2008 and have no cash to meet ongoing expenses or
debts that may accumulate. As of December 31, 2008, we had an accumulated
deficit of $(6,500).





We have
no commitment for any capital expenditure and foresee none. However, we will
incur routine fees and expenses incident to our reporting duties as a public
company, and we will incur expenses in finding and investigating possible
acquisitions and other fees and expenses in the event we make an acquisition or
attempts but are unable to complete an acquisition. Our cash requirements for
the next twelve months are relatively modest, principally legal, accounting
expenses and other expenses relating to making the filings required under the
Exchange Act. Any travel, lodging or other expenses which may arise related to
finding, investigating and attempting to complete a business combination with
one or more potential acquisitions could also amount to thousands of
dollars.





Our
current management has informally agreed to continue rendering services to us
and to not demand compensation unless and until we complete an acquisition. The
terms of any such payment will have to be negotiated with the principals of any
business acquired. The existence and amounts of our debt may make it more
difficult to complete, or prevent completion of, a desirable
acquisition.





We will
only be able to pay our future debts and meet operating expenses by raising
additional funds, acquiring a profitable company or otherwise generating
positive cash flow. As a practical matter, we are unlikely to generate positive
cash flow by any means other than acquiring a company with such cash flow. We
believe that management members or stockholders will loan funds to us as needed
for operations prior to completion of an acquisition. Management and
stockholders are not obligated to provide funds to us, however, and it is not
certain they will always want or be financially able to do so. Our stockholders
and management members who advance money to us to cover operating expenses will
expect to be reimbursed, either by us or by the company acquired, prior to or at
the time of completing a combination. We have no intention of borrowing money to
reimburse or pay salaries to any of our officers, directors or stockholders or
their affiliates. There currently are no plans to sell additional securities to
raise capital, although sales of securities may be necessary to obtain needed
funds. Our current management has agreed to continue their services to us and to
accrue sums owed them for services and expenses and expect payment reimbursement
only.




13





Should
existing management or stockholders refuse to advance needed funds, however, we
would be forced to turn to outside parties to either loan money to us or buy our
securities. There is no assurance whatever that we will be able to raise
necessary funds from outside sources. Such a lack of funds could result in
severe consequences to us, including among others:




·
            failure
      to make timely filings with the SEC as required by the Exchange Act, which
      could result in fines and penalties to us under the Exchange
      Act;




·
            curtailing
      or eliminating our ability to locate and perform suitable investigations
      of potential acquisitions; or




·
            inability
      to complete a desirable acquisition due to lack of funds to pay legal and
      accounting fees and acquisition-related
expenses




We hope to require potential candidate companies to deposit funds
with us that we can use to defray professional fees and travel, lodging and
other due diligence expenses incurred by our management related to finding and
investigating a candidate company and negotiating and consummating a business
combination. There is no assurance that any potential candidate will agree to
make such a deposit.





Critical
Accounting Policies





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported, including
the notes thereto, and related disclosures of commitments and contingencies, if
any.  We have identified certain accounting policies that are significant
to the preparation of our financial statements.  These accounting policies
are important for an understanding of our financial condition and results of
operation.  Critical accounting policies are those that are most important
to the portrayal of our financial conditions and results of operations and
require management’s difficult, subjective, or complex judgment, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods.  Certain
accounting estimates are particularly sensitive because of their significance to
financial statements and because of the possibility that future events affecting
the estimate may differ significantly from management's current judgments.
 We believe the following critical accounting policies involve the most
significant estimates and judgments used in the preparation of our financial
statements.




Income
Taxes. We utilize the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are determined
based on the differences between financial reporting basis and tax basis of the
assets and liabilities and are measured using enacted tax rates that will be in
effect when the differences are expected to reverse. An allowance against
deferred tax assets is recognized, when it is more likely than not, that such
tax benefits will not be realized.





Loss per Common
Share. Basic loss per share is calculated using the weighted-average
number of common shares outstanding during each period. Diluted loss per share
includes potentially dilutive securities such as outstanding options and
warrants, using various methods such as the treasury stock or modified treasury
stock method in the determination of dilutive shares outstanding during each
period. We do not have any potentially dilutive instruments.





Fair Value of
Financial Instruments. The carrying value of current assets and
liabilities approximate fair value due to their short term nature.





Recent Accounting
Pronouncements





In
December 2007, FASB issued SFAS No. 141R, Business Combinations, which
establishes principles and requirements for how the acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree, goodwill
acquired in the business combination or a gain from a bargain purchase. SFAS No.
141R is effective for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008. We do
not expect the adoption of SFAS No. 141R to have an effect on our financial
statements.




14





In
December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, which establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for financial
statements issued for fiscal years beginning on or after December 15, 2008, and
interim periods within those fiscal years. We do not expect the adoption of SFAS
No. 160 to have an effect on our financial statements.





Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on our
financial statements.





Off
Balance Sheet Arrangements





We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity or capital
expenditures or capital resources that is material to an investor in our
securities.





ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not
Applicable.





ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA.





The
financial statements required by this item begin on page F-1
hereof.





ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





None.






ITEM 9A(T).
            CONTROLS
      AND PROCEDURES.




Evaluation
of Disclosure Controls and Procedures




In
connection with the preparation of this annual report, an evaluation was carried
out by the Registrant’s management, with the participation of the principal
executive officer and the principal financial officer, of the effectiveness of
the Registrant’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange
Act”)) as of December 31, 2008. Disclosure controls and procedures are designed
to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Commission’s rules and forms,
and that such information is accumulated and communicated to management,
including the chief executive officer and the chief financial officer, to allow
timely decisions regarding required disclosures.




Based on
that evaluation, the Registrant’s management concluded, as of the end of the
period covered by this report, that the Registrant’s disclosure controls and
procedures were not effective in recording, processing, summarizing, and
reporting information required to be disclosed, within the time periods
specified in the Commission’s rules and forms, and that such information was not
accumulated and communicated to management, including the principal executive
officer and the principal financial officer, to allow timely decisions regarding
required disclosures.




15




Management’s
Report on Internal Control over Financial Reporting




The
management of the Registrant is responsible for establishing and maintaining
adequate internal control over financial reporting. The Registrant’s internal
control over financial reporting is a process, under the supervision of the
principal executive officer and the principal financial officer, designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Registrant’s financial statements for external
purposes in accordance with United States generally accepted accounting
principles (GAAP). Internal control over financial reporting includes those
policies and procedures that:




·Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the Registrant’s
assets;




·Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of the financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made only in
accordance with authorizations of management and the board of directors;
and




·Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Registrant’s assets that could have a
material effect on the financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.




The
Registrant’s management conducted an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, which
assessment identified material weaknesses in internal control over financial
reporting. A material weakness is a control deficiency, or a combination of
deficiencies in internal control over financial reporting that creates a
reasonable possibility that a material misstatement in annual or interim
financial statements will not be prevented or detected on a timely basis. Since
the assessment of the effectiveness of our internal control over financial
reporting did identify a material weakness, management considers its internal
control over financial reporting to be ineffective.




Management
has concluded that our internal control over financial reporting had the
following deficiency:




·We
do not have sufficient experience with financial statement preparation to ensure
that our statements are prepared in accordance with GAAP.  While this
control deficiency did not result in any audit adjustments to our 2007 or 2008
interim or annual financial statements, it could have resulted in a material
misstatement that might have been prevented or detected by a segregation of
duties. Accordingly we have determined that this control deficiency constitutes
a material weakness.




To the
extent reasonably possible, given our limited resources, our goal is, upon
consummation of a merger with a private operating company, to separate the
responsibilities of principal executive officer and principal financial officer,
intending to rely on two or more individuals. We will also seek to expand our
current board of directors to include additional individuals willing to perform
directorial functions. Since the recited remedial actions will require that we
hire or engage additional personnel, this material weakness may not be overcome
in the near term due to our limited financial resources. Until such remedial
actions can be realized, we will continue to rely on the advice of outside
professionals and consultants.




This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. We were not required to have, nor have we, engaged our independent
registered public accounting firm to perform an audit of internal control over
financial reporting pursuant to the rules of the Commission that permit us to
provide only management’s report in this annual report.




Changes
in Internal Controls over Financial Reporting




During
the period ended December 31, 2008, there has been no change in internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect our internal control over financial reporting.







ITEM
      9B.
            OTHER
      INFORMATION.





None.




16





PART
III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Directors
and Executive Officers





The
following sets forth the name and position of each of our current executive
officers and directors.





NAME
            AGE
            POSITIONAL Kennedy
            40
            President,
      Secretary and Director





AL
Kennedy has over 15 years experience in accounting and estate planning, and most
recently has provided financial and accounting services as an independent
consultant serving the commercial gaming industry.





Except as noted above, there are no
agreements or understandings for any of our executive officers or directors to
resign at the request of another person and no officer or director is acting on
behalf of,norwill any of them act at the direction
of,any other person.Directors are elected until their
successors are duly elected and qualified.




Family
Relationships




There are
no family relationships among any of our officers and directors.





Involvement
in Certain Legal Proceedings





To the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past five years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of
federal or state securities laws, except for matters that were dismissed without
sanction or settlement.  Except as set forth in our discussion below
in “Certain Relationships and Related Transactions, and Director Independence,”
none of our directors, director nominees or executive officers has been involved
in any transactions with us or any of our directors, executive officers,
affiliates or associates which are required to be disclosed pursuant to the
rules and regulations of the SEC.





Promoters
and Certain Control Persons





We did
not have any promoters at any time during the past five fiscal
years.





Section
16(A) Beneficial Ownership Reporting Compliance





Under
U.S. securities laws, directors, certain executive officers and persons holding
more than 10% of our common stock must report their initial ownership of the
common stock, and any changes in that ownership, to the SEC.  The SEC has
designated specific due dates for these reports. Ms. AL Kennedy, our sole
director, officer and stockholder, did file her Initial Statement of Beneficial
Ownership of Securities on Form 3 by the due date. No other reports were
required to be filed in fiscal year 2008.





Code
of Ethics





We have
not adopted a code ethics. We intend to adopt a code of ethics in the future
after we complete of a business combination with an operating
company.





Material
Changes to Director Nomination Procedures





There
have been no material changes to the procedures by which stockholders may
recommend nominees to our board of directors since such procedures were last
disclosed.




17




Audit
Committee and Audit Committee Financial Expert





We do not
have a standing audit committee or any committee performing a similar function,
although we intend to form such a committee in the future after we combine with
an operating entity. We do not have any audit committee financial expert serving
on our board of directors. We are currently a blank check company whose plan of
operation is to seek, and if possible, acquire an operating business or assets
by entering into a business combination. As such, we have no capital resources
and very little business or financial activity. Therefore, we could not afford
to retain a qualified audit committee financial expert, nor does our business or
financial activities currently require the retention of such an
expert.





ITEM
      11.
            EXECUTIVE
      COMPENSATION.





Summary
Compensation – 2008 and 2007





For the
year ended December 31, 2008, and through the date of this report, we have not
paid any executive officer or director any cash or cash equivalent compensation.
We have no agreements or understandings, express or implied, with any director
or executive officer concerning employment or cash or other compensation for
services. We will undoubtedly pay compensation to officers and other employees
should we succeed in acquiring a business that has funds available to pay such
compensation.





Outstanding
Equity Awards at Fiscal Year End





None of
our executive officers received any equity awards, including, options,
restricted stock or other equity incentives during the fiscal year ended
December 31, 2008.





Compensation
of Directors





During
the fiscal year ended December 31, 2008, there were no fees earned or paid in
cash for services to our directors and no stock or stock options or other equity
incentives were awarded to our directors. We have no standard arrangements in
place to compensate our directors for their service as directors or as members
of any committee of directors. In the future, if we retain non-employee
directors, we may decide to compensate them for their service to us as directors
and members of committees.





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.





Security
Ownership of Certain Beneficial Owners and Management





The
following table sets forth, as of March 30, 2009, certain information with
respect to the beneficial ownership of our common stock by (i) each director and
executive officer, (ii) each person known by us to be the beneficial owner of
five percent or more of the outstanding shares of common stock, and (iii) all
directors and executive officers as a group.  Unless otherwise
specified, the address of each of the persons set forth below is in care of the
Company.





Name
      & Address of Beneficial Owner
            Office,
      If Any
            Title
      of Class
            Amount
      and Nature of Beneficial Ownership(1)
            Percent
      of Class(2)Officers
      and DirectorsAL
      Kennedy
            President,
      Secretary and Director
            Common
      Stock, $.001 par value
            1,390,000
            100%All
      officers and directors as a group (1 person named above)
            
            Common
      Stock, $.001 par value
            1,390,000
            100%5%
      Security HoldersAL
      Kennedy
            
            Common
      Stock, $.001 par value
            1,300,000
            100%


(1)
            Beneficial
      Ownership is determined in accordance with the rules of the SEC and
      generally includes voting or investment power with respect to securities.
      Except as noted below, each of the beneficial owners listed above has
      direct ownership of and sole voting power and investment power with
      respect to the shares of our common
stock.




(2)
            As
      of March 30, 2009, a total of 1,390,000 shares of our common stock are
      considered to be outstanding pursuant to SEC Rule 13d-3(d)(1).  For
      each Beneficial Owner above, any options exercisable within 60 days have
      been included in the denominator.




18




Changes in Control





None





Securities Authorized for Issuances
under Equity Compensation Plans





We do not
have in effect any compensation plans under which our equity securities are
authorized for issuance and we do not have any outstanding stock
options.





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR  INDEPENDENCE.





Related
Party Transactions





The
following includes a summary of transactions since the beginning of the 2008
fiscal year, or any currently proposed transaction, in which we were or are to
be a participant and the amount involved that exceeded or exceeds the lesser of
$120,000 or one percent of the average of our total assets at year-end for the
last two completed fiscal years, and in which any related person had or will
have a direct or indirect material interest (other than compensation described
under Item 11. “Executive Compensation”).  We believe the terms obtained or
consideration that we paid or received, as applicable, in connection with the
transactions described below were comparable to terms available or the amounts
that would be paid or received, as applicable, in arm’s-length
transactions.




Except as
set forth in our discussion above, none of our directors, director nominees or
executive officers has been involved in any transactions with us or any of our
directors, executive officers, affiliates or associates which are required to be
disclosed pursuant to the rules and regulations of the SEC.





Director
Independence





We
currently do not have any independent directors, as the term “independent” is
defined by the rules of the Nasdaq Stock Market.





ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES.





Independent
Auditors’ Fees





The
following is a summary of the fees billed to the Company by Rotenberg & Co.,
LLP for professional services rendered for the fiscal years ended December 31,
2008:





2008
            
            
            2007Audit
      Fees
            
            $
            2,750
            
            
            $
            1,250Audit-Related
      Fees
            
            
            ----
            
            
            
            ----Tax
      Fees
            
            
            ----
            
            
            
            ----All
      Other Fees
            
            
            ----
            
            
            
            ----TOTAL
            
            $
            2,750
            
            
            $
            1,250





“Audit Fees” consisted of fees billed for
professional services rendered by the principal accountant for the audit of our
annual financial statements and review of the financial statements included in
our Form 10-Q or services that are normally provided by the accountant in
connection with statutory and regulatory filings or
engagements.




19





“Audit-Related
Fees” consisted of fees billed for assurance and related services by the
principal accountant that were reasonably related to the performance of the
audit or review of our financial statements and are not reported under the
paragraph captioned “Audit Fees” above.





“Tax
Fees” consisted of fees billed for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax
planning.





“All
Other Fees” consisted of fees billed for products and services provided by the
principal accountant, other than the services reported above under other
captions of this Item 14.





Pre-Approval
Policies and Procedures





Under the
Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our
auditors must be approved in advance by our board of directors to assure that
such services do not impair the auditors’ independence from us. In accordance
with its policies and procedures, our board of directors pre-approved the audit
service performed by Rotenberg & Co., LLP for our financial statements as of
and for the year ended December 31, 2008.





PART
IV




ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.





Financial
Statements and Schedules





The
financial statements are set forth under Item 8 of this annual report on Form
10-K. Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.





Exhibit
List





The
following exhibits are filed as part of this report or incorporated by
reference:





Exhibit
      No.
            
            Description3.1
            
            Certificate
      of Incorporation of the registrant [incorporated by reference to Exhibit
      3.1 to the registrant’s registration statement on Form 10-SB filed on
      February 16, 2007]3.2
            
            Bylaws
      of the registrant [incorporated by reference to Exhibit 3.1 to the
      registrant’s registration statement on Form 10-SB filed
      on  March 15, 2007.31.1*
            
            Certifications
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2*
            
            Certifications
      of Principal Financial and Accounting Officer Pursuant to Section 302
      of the Sarbanes-Oxley Act of 200232.1*
            
            Certifications
      of Principal Executive Officer and Principal Financial and Accounting
      Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002





*Filed
herewith.




20




ILLUSION
DIGITAL SYSTEMS, INC




INDEX
TO FINANCIAL STATEMENTS







Contents
            
            PageReport
      of Independent Registered Public Accounting Firm
            
            F-1Balance
      Sheets as of December 31, 2008 and 2007
            
            F-2Statements
      of Operations for the Year Ended December 31, 2008 and the Period
      from
              February
      16, 2007 (Inception) through December 31, 2007and for the period from
      February 16, 2007 (Inception) through December 31, 2008
            
            F-3Statements
      of Changes in Stockholder’s Equity for the Period from February 16, 2007
      (Inception) through December 31, 2008
            
            F-4Statements
      of Cash Flows for the Year Ended December 31, 2008 and the Period from
      February 16, 2007 (Inception) through December 31, 2007and for the period
      from February 16, 2007 (Inception) though December 31,
2008
            
            F-5Notes
      to Financial Statements
            
            F-6




21





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholder of


Illusion
Digital Systems, Inc. (formerly Lexit Technology, Inc.)








We have
audited the accompanying balance sheets of Illusion Digital Systems, Inc.
(formerly Lexit Technology, Inc.) as of December 31, 2008 and 2007, and the
related statements of operations, changes in stockholder’s equity, and cash
flows for the year ended December 31, 2008, for the period from the date of
inception (February 16, 2007) throughDecember 31, 2007, and
for the period from the date of inception (February 16, 2007) through December
31, 2008. Illusion
Digital Systems, Inc.’s (formerly Lexit Technology, Inc.) management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Illusion Digital Systems, Inc.
(formerly Lexit Technology, Inc.) as of December 31, 2008 and 2007, and the
results of its operations and its cash flows for the year ended December 31,
2008, for the period from the date of inception (February 16, 2007) through
December 31, 2007 and for the period from the date of inception (February 16,
2007) through December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America.





The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 3 to the financial statements, the Company’s accumulated
deficit and absence of revenue generating activities raise substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.











Rochester,
New York


April 15,
2009




F-1








ILLUSION
DIGITAL SYSTEMS, INC


(A
Development Stage Enterprise)


Balance
Sheets


December
31, 2008








December
      31,
            
            
            December
      31,2008
            
            
            2007Assets:
            
            $Current
      Assets:Cash
            
            
            -
            
            
            
            --Total
      Current Assets
            
            
            -
            
            
            
            --TOTAL
      ASSETS
            
            
            -LIABILITIES
      AND STOCKHOLDER’S EQUITY:Commitment
      and contingencies
            
            
            -
            
            
            
            --Current
      Liabilities:Advances
      from Officers
            
            
            -
            
            
            
            --Total
      Current Liabilities
            
            
            -
            
            
            
            --TOTAL
      LIABILITIES
            
            
            -
            
            
            
            --Stockholder’s
      equity:Common
      stock, $.001 par value, authorized 100,000,000 shares 1,390,000 issued and
      outstanding
            
            
            1,390
            
            
            
            1,390Additional
      paid in capital
            
            
            5,110
            
            
            
            2,360Deficit
      accumulated during the development stage
            
            
            (6,500
            )
            
            
            (3,750
            )Total
      Stockholders’ equity
            
            
            --
            
            
            
            --TOAL
      LIABILITIES AND STOCKHOLDERS DEFICIT
            
            $
            -




The
accompanying notes are an integral part of these financial
statements.




F-2




ILLUSION
DIGITAL SYSTEMS, INC


(A
Development Stage Enterprise)


Statements
of Operations




Income
            
            For
      the Year Ended December 31, 2008
            
            
            For
      the period February 16, 2007 (Inception) through December 31,
      2007
            
            
            For
      the period February 16, 2007 (Inception) through December 31,
      2008Revenue
            
            
            
            
            
            
            -
            
            
            
            -Expenses
            
            
            
            
            
            
            -
            
            
            
            -General
      and Administrative
            
            
            (2,750
            )
            
            
            (3,750
            )
            
            
            (6,500
            )TOTAL
      EXPENSES
            
            
            (2,750
            )
            
            
            (3,750
            )
            
            
            (6,500
            )Net
      loss per share (basic and diluted)
            
            
            (2,750
            )
            
            
            (3,750
            )
            
            
            (6,500
            )Weighted
      average shares outstanding (basic and diluted)
            
            
            1,390,000
            
            
            
            1,390,000
            
            
            
            1,390,000




The
accompanying notes are an integral part of these financial
statements.




F-3




ILLUSION
DIGITAL SYSTEMS, INC


(A
Development Stage Enterprise)


Statements
of Changes in Stockholder’s Equity


For
the Period February 16, 2007 (Inception) through December 31, 2008




Common
      StockNumber
      of Shares
            
            
            Value
            
            
            Additional
              Paid
      In Capital
            
            
            Accumulated
      (Deficit) During the Development Stage
            
            
            Total
      Stockholders’ EquityInception  -
      February 16, 2007
            
            $
            -
            
            
            $
            -
            
            
            $
            --
            
            
            
            -
            
            
            $
            -Issuance
      of shares to founder
            
            
            1,390,000
            
            
            
            1,390.00
            
            
            
            --
            
            
            
            -
            
            
            
            1,390.00Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            (3,750
            )
            
            
            (3,750
            )Capital
      contributed in lieu of expenses paid
            
            
            
            
            
            
            
            
            
            
            2,360
            
            
            
            0.00
            
            
            
            2,360Balance
      – December 31, 2007
            
            $
            1,390,000
            
            
            $
            1,390.00
            
            
            $
            2,360
            
            
            
            (3,750
            )
            
            $
            --Net
      loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (2,750
            )
            
            
            (2,750
            )Capital
      contributed in lieu of expenses paid
            
            
            --
            
            
            
            --
            
            
            
            2,750
            
            
            
            --
            
            
            
            2,750Balance
      – December 31, 2008
            
            $
            1,390,000
            
            
            $
            1,390.00
            
            
            $
            5,110
            
            
            
            (6,500
            )
            
            $
            --




The
accompanying notes are an integral part of these financial
statements.




F-4




ILLUSION
DIGITAL SYSTEMS, INC


(A
Development Stage Enterprise)


Statements
of Cash Flows





Cash
      Flows from Operating Activities:
            
            For
      the Year Ended December 31, 2008
            
            
            For
      the period February 16, 2007 (Inception) through December 31,
      2007
            
            
            For
      the period February 16, 2007 (Inception) through December 31,
      2008-Net
      Loss
            
            $
            (2,750
            )
            
            
            (3,750
            )
            
            
            (6,500
            )Shares
      issued in lieu of expenses paid
            
            
            --
            
            
            
            1390
            
            
            
            1390Capital
      contributed in lieu of expenses paid
            
            
            2,750
            
            
            
            2,360
            
            
            
            5,110Cash
      Flows used in Operating Activities
            
            
            0
            
            
            
            --
            
            
            
            0Net
      Increase in Cash
            
            
            
            
            
            
            -
            
            
            
            -Cash
      and cash equivalents - Beginning of period
            
            
            
            
            
            
            -
            
            
            
            --Cash
      and cash equivalents - End of period
            
            
            
            
            
            
            -
            
            
            
            --SUPPLEMENTARY
      INFORMATIONInterest
      Paid
            
            
            
            
            
            
            -
            
            
            
            --Taxes
      Paid
            
            
            
            
            
            
            -
            
            
            
            --




The
accompanying notes are an integral part of these financial
statements.




F-5




HOLLYWOOD
ENTERTAINMENT EDU HOLDING, INC


(A
Development Stage Enterprise)


Notes
to Financial Statements


December
31, 2008





Note 1 - Development Stage
Company:





Nature of
Operations





ILLUSION
DIGITAL SYSTEMS, INC.,  (“the Company”) was incorporated in the State
of Colorado on February 16, 2007 as Lexit Technology, Inc., and has been
inactive since inception. The company changed its name to Illusion Digital
Systems, Inc on August 14, 2008.  The Company is 100% owned
by AL Kennedy. The Company is looking to acquire an existing company or acquire
the technology to begin operations.





As a
blank check company, the Company’s business is to pursue a business combination
through acquisition, or merger with, an existing company. No assurances can be
given that the Company will be successful in locating or negotiating with any
target company.





Since
inception, the Company has been engaged in organizational efforts.





Note 2 - Summary of
Significant Accounting Policies:





The
accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States. Significant accounting
policies follow:





Use of Estimates: The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the balance sheet
and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.





Income Taxes: The
Company utilizes the liability method of accounting for income taxes. Under the
liability method, deferred tax assets and liabilities are determined based on
the differences between financial reporting basis and tax basis of the assets
and liabilities and are measured using enacted tax rates that will be in effect
when the differences are expected to reverse. An allowance against deferred tax
assets is recognized, when it is more likely than not, that such tax benefits
will not be realized.





Loss per Common
Share: Basic loss per share is calculated using the weighted-average
number of common shares outstanding during each period. Diluted loss per share
includes potentially dilutive securities such as outstanding options and
warrants, using various methods such as the treasury stock or modified treasury
stock method in the determination of dilutive shares outstanding during each
period. The Company does not have any potentially dilutive
instruments.





Fair Value of Financial
Instruments: The carrying value of current assets and liabilities
approximate fair value due to their short term nature.




F-6





ILLUSION
DIGITAL SYSTEMS, INC


(A
Development Stage Enterprise)


Notes
to Financial Statements


December
31, 2008




New Accounting
Pronouncements




In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141R (“FAS 141R”), Business Combinations,
which establishes principles and requirements for how the acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree, goodwill
acquired in the business combination or a gain from a bargain purchase. FAS 141R
is effective for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company presently does not expect the adoption of FAS 141R to have an effect on
its financial statements.





In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 160 (“FAS 160”), Noncontrolling Interests in
Consolidated Financial Statements, which establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. FAS 160 is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008, and interim
periods within those fiscal years. The Company presently does not expect the
adoption of FAS 160 to have an effect on its financial statements.





Management
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
accompanying financial statements.





Note 3 - Going
Concern:





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the recoverability of
assets and the satisfaction of liabilities in the normal course of
business.





The
Company has had no revenue and has incurred accumulated net losses from February
16, 2007 (inception) through the period ended December 31, 2008 of
$(6,500).  In addition, the Company’s development activities since
inception have been financially sustained through equity financing.





The
ability of the Company to continue as a going concern is dependent upon its
ability to find a suitable acquisition/merger candidate, raise additional
capital from the sale of common stock, and receive additional paid-in capital
from its shareholder and, ultimately, the achievement of significant operating
revenues. The accompanying financial statements do not include any adjustments
that might be required should the Company be unable to recover the value of its
assets or satisfy its liabilities.




F-7




ILLUSION
DIGITAL SYSTEMS, INC.


(A
Development Stage Enterprise)


Notes
to Financial Statements


December
31, 2008





Note 4 – Shareholder’s
Equity:





Holders
of shares of common stock shall be entitled to cast one vote for each common
share held at all stockholder’s meetings for all purposes, including the
election of directors. The common stock does not have cumulative voting
rights.





The
preferred stock of the Company shall be issued by the Board of Directors of the
Company in one or more classes or one or more series within any class and such
classes or series shall have such voting powers, full or limited, or no voting
powers, and such designations, preferences, limitations or restrictions as the
Board of Directors of the Company may determine, from time to time.





No holder
of shares of stock of any class shall be entitled as a matter of right to
subscribe for or purchase or receive any part of any new or additional issue of
shares of stock of any class, or of securities convertible into shares of stock
of any class, whether now hereafter authorized or whether issued for money, for
consideration other than money, or by way of dividend.





Note 5 - Income
Taxes:





No
current provision or benefit for federal income taxes has been recorded for the
year ended December 31, 2008 or for any period from inception through December
31, 2008 as the Company has no taxable income or loss.





Note 6 - Related Party
Transactions:





The
Company utilizes the office space and equipment of its sole stockholder at no
cost. Management estimates such amounts to be immaterial.





F-8




SIGNATURES







In
accordance with section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereto duly authorized individual.




Date:
March 30, 2009


ILLUSION
      DIGITAL SYSTEMS, INCBy:
            /s/AL
      KennedyAL
      KennedyPresident







In accordance with the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.





Signature
            Title
            Date/s/
      AL Kennedy
            
            President,
      Secretary and sole Director
            March
      30, 2009AL
      Kennedy
            (Principal
      Executive Officer and Principal Accounting
              and
      Financial Officer)