Digital Illusions was founded in May 1992 in Växjö, Sweden by five people: Ulf Mandorff, Olof Gustafsson, Fredrik Liliegren, Andreas Axelsson and Markus Nyström, members of the former demogroup The Silents. For an extended period of time, while the employees were also students at Växjö University, the company's office consisted of a small dorm room. During those days the company developed popular pinball games for the Amiga. The company moved to Gothenburg in 1994 where it was headquartered until 2005, when that office was merged with the ex-Refraction Games office in Stockholm.
In January 2000 Digital Illusions bought Refraction Games.
In January 2000 Digital Illusions bought 90% of Synergenix Interactive.