<PAGE>

                                                                   EXHIBIT 10.3

                             PERCEPTRONICS, INC.
                      1988 DIRECTORS' STOCK OPTION PLAN
                 (amended and restated through July 8, 1992)


1.   PURPOSE

     The purpose of the Perceptronics, Inc. 1988 Directors' Stock Option Plan
(the "Plan") is to assist the Company in attracting, motivating and retaining
qualified non-employee directors by providing for or increasing their
proprietary interest in the Company through the grant of options to acquire
shares of Company Common Stock. The Plan provides for the grant of options
which do not qualify as "incentive stock options" within the meaning of
Section 422A of the Code (e.g. non-qualified stock options).

2.   DEFINITIONS

     Whenever used herein the following terms shall have the following
meanings, respectively:

     a.  "Board" shall mean the Board of Directors of the Company.

     b.  "Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.

     c.  "Common Stock" shall mean the Company's Common Stock, $.001 par
value per share, as described in the Company's Certificate of Incorporation,
as amended.

     d.  "Company" shall mean Perceptronics, Inc., a Delaware corporation.

     e.  "Fair Market Value Per Share" of the Company's Common Stock shall
mean the closing price of the Company's Common Stock on the NASDAQ National
Market System or any exchange on which the Common Stock is listed on the date
of the grant of the Option or, if not available, the mean between the bona
fide bid and asked prices of the Common Stock on the date of the grant of the
Option. If there were no sales on the date of the grant of an Option, the
Fair Market Value Per Share shall be determined on the immediately preceding
date on which there were sales.

     f.  "Option" shall mean a non-qualified option granted pursuant to the
Plan.

     g.  "Optionee" shall mean any non-employee director who has been granted
an Option to purchase shares of Common Stock under the Plan.


<PAGE>

     h.  "Plan" shall mean the Perceptronics, Inc. 1988 Directors' Stock
Option Plan, as amended from time to time.

     i.  "Subsidiary" shall have the meaning set forth in Section 425(f) of
the Code.

3.   ADMINISTRATION

     Subject to the provisions of the Plan, the Board shall have the
authority to construe, interpret and administer the Plan, and to make all
determinations necessary or advisable for the administration of the Plan. All
determinations and interpretations made by the Board shall be final,
conclusive and binding on all Optionees and on their guardians, legal
representatives and beneficiaries.

4.   SHARES SUBJECT TO THE PLAN

     Subject to adjustments in accordance herewith, the stock to be offered
under the Plan shall consist of up to 100,000 shares of the Company's Common
Stock. If any Option granted hereunder shall expire or terminate for any
reason without having been exercised in full, the unpurchased shares subject
thereto shall again be available for purposes of this Plan.

     If the number of outstanding shares of Common Stock of the Company are
increased or decreased, or if such shares are exchanged for a different
number or kind of shares or securities of the Company through reorganization,
merger, recapitalization, reclassification, stock dividend, stock split,
combination of shares, or other similar transaction, the aggregate number of
shares of Common Stock subject to the Plan as provided herein and the shares
of Common Stock subject to issued and outstanding Options under the Plan
shall be appropriately and proportionately adjusted by the Board. Any such
adjustment in the outstanding Options shall be made without change in the
aggregate purchase price applicable to the unexercised portion of the Option
but with an appropriate adjustment in the price for each share or other unit
of any security covered by the Option.

     Adjustments under this Section shall be made by the Board, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. No fractional shares of stock shall
be issued under the Plan or in connection with any such adjustment.

5.   ELIGIBILITY AND PARTICIPATION

     Options may be granted only to non-employee directors of the Company.
Employees of the Company or any Subsidiary of the Company are not eligible to
receive Options under the Plan. For purposes


                                       2
<PAGE>

of the Plan, directors who perform consulting services for the Company or any
Subsidiary are not deemed to be "employees" of the Company.

6.  ANNUAL OPTION GRANTS

    On April 1 of each year, each non-employee director who was a director of
the Company for the entire immediately preceding year shall automatically be
granted an Option to purchase 2,000 shares of Common Stock, except that
Julius E. Uhlaner shall be granted an option to purchase 4,000 shares of
Common Stock, as long as he is a non-employee director of the Company. Any
person who was not a non-employee director during the entire immediately
preceding fiscal year shall receive Options for a number of shares determined
by multiplying 2,000 by a fraction, the numerator of which is the full number
of months he has been a non-employee director and the denominator of which is
12. Each Option shall be evidenced by an Option Agreement duly executed on
behalf of the Company and by the Optionee. Each Option Agreement shall comply
with and be subject to the terms and conditions of the Plan. Any Agreement
may contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Board.

7.  PURCHASE PRICE

    The purchase price of each share covered by each Option shall be 100% of
the Fair Market Value Per Share of the Common Stock of the Company.

8.  DURATION OF OPTIONS

    Subject to prior termination in accordance with Section 11 hereof, the
expiration date of each Option shall be the first to occur of (i) five (5)
years from the date on which the Option was granted or (ii) on the effective
date of the dissolution or liquidation of the Company, or any reorganization,
merger or consolidation with one or more corporations as a result of which
the Company is not the surviving corporation, or a sale of all or
substantially all of the assets of the Company.

9.  EXERCISE OF OPTIONS

    a.  Options shall be fully vested and immediately exercisable. An
Optionee may purchase less than the total number of shares for which the
Option is exercisable, provided that a partial exercise of an Option may not
be for less than 50 shares, unless the exercise is during the final year of
the Option, and shall not include any fractional shares. As a condition to
the exercise, in whole or in part, of any Option, the Board may in its sole
discretion require the Optionee to pay, in addition to the purchase price of
the shares covered by the Option, an amount equal to any federal, state and
local taxes that the Board has determined

                                       3

<PAGE>

are required to be paid in connection with the exercise of such Option in
order to enable the Company to claim a deduction or otherwise.

     b.  Options may be exercised from time to time by giving written notice
to the Company stating the number of shares with respect to which the Option
is being exercised, accompanied by payment in full, by cash or check payable
to the order of the Company or the equivalent thereof acceptable to the
Company, of the purchase price for the number of shares being purchased and,
if applicable, any federal, state or local taxes required to be paid in
accordance with the provisions of Subsection (a) hereof.

     c.  In the Board's discretion, payment of the purchase price for the
shares with respect to which the Option is being exercised may be made in
whole or in part with shares of Common Stock of the Company. If payment is
made with shares of Common Stock, the Optionee, or other person entitled to
exercise the Option, shall deliver to the Company certificates representing
the number of shares of Common Stock in payment for the shares being
purchased, duly endorsed for transfer to the Company. If requested by the
Board, prior to the acceptance of such certificates in payment for such
shares, the Optionee, or any other person entitled to exercise the Option,
shall supply the Board with a representation and warranty in writing that he
has good and marketable title to the shares represented by the
certificate(s), free and clear of all liens and encumbrances. The value of
the shares of Common Stock tendered in payment for the shares being purchased
shall be their Fair Market Value Per Share on the date of exercise of the
Option.

     d.  Notwithstanding the foregoing, the Company shall have the right to
postpone the time of delivery of the shares for such period as may be
required for it to comply, with reasonable diligence, with any applicable
listing requirements of any national securities exchange or any registration
or qualification requirements of any federal or state securities laws.

10.  NON-TRANSFERABILITY OF OPTIONS

     No Option granted under the Plan shall be assignable or transferable by
the Optionee, either voluntarily or by operation of law, otherwise than by
will or the laws of descent and distribution, and shall be exercisable during
his lifetime only by the Optionee.

11.  TERMINATION

     Subject to the limitation stated in the last sentence of this Section
11, Options shall terminate prior to the expiration of their term as follows:
(i) if an Optionee ceases to be a director of the Company for any reason
other than death or pursuant to Subsection (iii) hereof, he may at any time
within three months

                                       4




<PAGE>

after such termination exercise his Option(s); (ii) if an Optionee dies while
serving as a director of the Company, or within three months after
termination of such status (other than termination pursuant to Subsection
(iii) hereof), his Option(s) may be exercised by the person or persons to
whom his rights under the Option shall pass by will or by the laws of descent
and distribution, for a period of one year after the date of death; and (iii)
an Optionee's Options shall immediately terminate on the date his
directorship is terminated on account of any act of (a) fraud or intentional
misrepresentation, or (b) embezzlement, misappropriation or conversion of
assets or opportunities of the Company or any direct or indirect majority
owned subsidiary of the Company. In no event may an Option be exercised to
any extent by anyone after the expiration of its term.

12. AMENDMENT AND TERMINATION OF PLAN

     a. The Board may from time to time, with respect to any shares at the
time not subject to Options, suspend or terminate the Plan or amend or revise
the terms of the Plan; provided that (y) any amendment to the Plan shall be
approved by a majority of the shares of the Company present at any meeting and
entitled to vote thereat either prior to or within one year after the
amendment, if the amendment would (i) materially increase the benefits
accruing to participants under the Plan; (ii) increase the number of shares
of Common Stock which may be issued under the Plan; or (iii) materially
modify the requirements as to eligibility for participation in the Plan; and
(z) no amendment shall be made more than once every six months that would
change the amount, price or timing of Option grants, other than to comport
with changes in the Code, the Employee Retirement Security Act or the rules
thereunder.

     b. No amendment, suspension or termination of the Plan shall, without
the consent of the Optionee, alter or impair any rights or obligations under
any Option theretofore granted to such Optionee under the Plan.

     c. The terms and conditions of any Option granted to an Optionee under
the Plan may be modified or amended only by a written agreement executed by
the Optionee and the Company.

13. EFFECTIVE DATE OF PLAN

     This Plan shall become effective upon adoption by the Board of Directors
of the Company and approval by the Company's shareholders and no Options maybe
granted under the Plan until such shareholder approval has been obtained.

                                       5

<PAGE>

14. TERM OF PLAN

     No Option shall be granted pursuant to the Plan after 10 years from the
earlier of the date of adoption of the Plan by the Board of Directors of the
Company or the date of approval of the Plan by the Company's shareholders.

     The date of adoption of the Plan by the Board was July 19, 1988. The
date of the approval of the Plan by the Shareholders was October 27, 1988.


                                       6