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                                                                    EXHIBIT 10.3
 
                        DIGITAL GENERATION SYSTEMS, INC.
 
                           1995 DIRECTOR OPTION PLAN
                          (AS AMENDED JANUARY 23, 1997)
 
     1. PURPOSES OF THE PLAN. The purposes of this 1995 Director Option Plan are
to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
 
     All options granted hereunder shall be nonstatutory stock options.
 
     2. DEFINITIONS. As used herein, the following definitions shall apply:
 
          (a) "Board" means the Board of Directors of the Company.
 
          (b) "Code" means the Internal Revenue Code of 1986, as amended.
 
          (c) "Common Stock" means the Common Stock of the Company.
 
          (d) "Company" means Digital Generation Systems, Inc., a California
     corporation.
 
          (e) "Continuous Status as a Director" means the absence of any
     interruption or termination of service as a Director.
 
          (f) "Director" means a member of the Board.
 
          (g) "Employee" means any person, including officers and Directors,
     employed by the Company or any Parent or Subsidiary of the Company. The
     payment of a Director's fee by the Company shall not be sufficient in and
     of itself to constitute "employment" by the Company.
 
          (h) "Exchange Act" means the Securities Exchange Act of 1934, as
     amended.
 
          (i) "Fair Market Value" means, as of any date, the value of Common
     Stock determined as follows:
 
             (i) If the Common Stock is listed on any established stock exchange
        or a national market system, including without limitation the Nasdaq
        National Market of the National Association of Securities Dealers, Inc.
        Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share
        of Common Stock shall be the closing sales price for such stock (or the
        closing bid, if no sales were reported) as quoted on such system or
        exchange (or the exchange with the greatest volume of trading in Common
        Stock) on the date of determination, as reported in The Wall Street
        Journal or such other source as the Board deems reliable;
 
             (ii) If the Common Stock is quoted on the NASDAQ System (but not on
        the National Market thereof) or regularly quoted by a recognized
        securities dealer but selling prices are not reported, the Fair Market
        Value of a Share of Common Stock shall be the mean between the high bid
        and low asked prices for the Common Stock on the date of determination,
        as reported in The Wall Street Journal or such other source as the Board
        deems reliable, or;
 
             (iii) In the absence of an established market for the Common Stock,
        the Fair Market Value thereof shall be determined in good faith by the
        Board.
 
          (j) "Option" means a stock option granted pursuant to the Plan.
 
          (k) "Optioned Stock" means the Common Stock subject to an Option.
 
          (l) "Optionee" means an Outside Director who receives an Option.
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          (m) "Outside Director" means a Director who is neither (i) an
     Employee, nor (ii) an affiliate of an institutional investor in the
     Company, provided that, upon the date of the first annual meeting of
     shareholders following an initial public offering, this subpart (ii) shall
     no longer be applicable.
 
          (n) "Parent" means a "parent corporation," whether now or hereafter
     existing, as defined in Section 424(e) of the Code.
 
          (o) "Plan" means this 1995 Director Option Plan.
 
          (p) "Share" means a share of the Common Stock, as adjusted in
     accordance with Section 10 of the Plan.
 
          (q) "Subsidiary" means a "subsidiary corporation," whether now or
     hereafter existing, as defined in Section 424(f) of the Internal Revenue
     Code of 1986.
 
     3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 100,000 Shares of Common Stock (the "Pool"). The Shares may be
authorized, but unissued, or reacquired Common Stock.
 
     If an Option expires or becomes unexercisable without having been exercised
in full, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan shall not be returned to the Plan and shall not become available for
future distribution under the Plan.
 
     4. ADMINISTRATION AND GRANTS OF OPTIONS UNDER THE PLAN.
 
     (a) Procedure for Grants. All grants of Options to Outside Directors under
this Plan shall be automatic and nondiscretionary and shall be made strictly in
accordance with the following provisions:
 
          (i) No person shall have any discretion to select which Outside
     Directors shall be granted Options or to determine the number of Shares to
     be covered by Options granted to Outside Directors.
 
          (ii) Each Outside Director shall be automatically granted an Option to
     purchase 10,000 Shares (the "First Option") on the date on which the later
     of the following events occurs: (A) the effective date of this Plan, as
     determined in accordance with Section 6 hereof, or (B) the date on which
     such person first becomes an Outside Director, whether through election by
     the shareholders of the Company or appointment by the Board to fill a
     vacancy; provided, however, that no First Option shall be granted to an
     Outside Director who, immediately prior to becoming an Outside Director,
     was a Director.
 
          (iii) After the First Option has been granted to an Outside Director,
     such Outside Director shall thereafter be automatically granted an Option
     to purchase 2,500 Shares (a "Subsequent Option") on the anniversary date of
     the First Option.
 
          (iv) Notwithstanding the provisions of subsections (ii) and (iii)
     hereof, any exercise of an Option made before the Company has obtained
     shareholder approval of the Plan in accordance with Section 16 hereof shall
     be conditioned upon obtaining such shareholder approval of the Plan in
     accordance with Section 16 hereof.
 
          (v) The terms of a First Option granted hereunder shall be as follows:
 
             (A) the term of the First Option shall be ten (10) years.
 
             (B) the options granted thereunder shall be exercisable only while
        the Outside Director remains a Director of the Company, except as set
        forth in Section 8 hereof.
 
             (C) the exercise price per Share shall be the fair market value per
        Share on the date of grant. In the event that the date of grant is not a
        trading day, the exercise price per Share shall be the Fair Market Value
        on the next trading day immediately following the date of grant, or, in
        the event there is no trading market for the Shares at the date of
        grant, at the Fair Market Value of such Shares as determined by the
        Board of Directors.
 
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             (D) the First Option shall become exercisable as to 1/36th of the
        Shares on the first day of each month following the grant date, provided
        that the Optionee continues to serve as a Director on such dates.
 
          (vi) The terms of a Subsequent Option granted hereunder shall be as
     follows:
 
             (A) the term of the Subsequent Option shall be ten (10) years.
 
             (B) the Subsequent Option shall be exercisable only while the
        Outside Director remains a Director of the Company, except as set forth
        in Section 8 hereof.
 
             (C) the exercise price per Share shall be the fair market value per
        Share on the date of grant. In the event that the date of grant is not a
        trading day, the exercise price per Share shall be the Fair Market Value
        on the next trading day immediately following the date of grant or, in
        the event there is no trading market for the Shares at the date of
        grant, at the Fair Market Value of such Shares as determined by the
        Board of Directors.
 
             (D) the Subsequent Option shall become exercisable as to 1/12th of
        the Shares subject to the Subsequent Option on the first day of each
        month following the second anniversary of its date of grant, provided
        that the Optionee continues to serve as a Director on such dates.
 
          (vii) In the event that any Option granted under the Plan would cause
     the number of Shares subject to outstanding Options plus the number of
     Shares previously purchased under Options to exceed the Pool, then the
     remaining Shares available for Option grant shall be granted under Options
     to the Outside Directors on a pro rata basis. No further grants shall be
     made until such time, if any, as additional Shares become available for
     grant under the Plan through action of the Board or the shareholders to
     increase the number of Shares which may be issued under the Plan or through
     cancellation or expiration of Options previously granted hereunder.
 
     5. ELIGIBILITY. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof. An Outside Director who has been granted an Option may, if he
or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
 
     The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
 
     6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur
of its adoption by the Board or its approval by the shareholders of the Company
as described in Section 16 of the Plan. It shall continue in effect for a term
of ten (10) years unless sooner terminated under Section 11 of the Plan.
 
     7. FORM OF CONSIDERATION. The consideration to be paid for the Shares to be
issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) delivery of a properly
executed exercise notice together with such other documentation as the Company
and the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (v) any combination of the foregoing methods of payment.
 
     8. EXERCISE OF OPTION.
 
     (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times as are set forth in Section 4
hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
 
     An Option may not be exercised for a fraction of a Share.
 
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     An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
 
     Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
 
     (b) Termination of Continuous Status as a Director. In the event an
Optionee's Continuous Status as a Director terminates (other than upon the
Optionee's death or total and permanent disability (as defined in Section
22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only
within three (3) months following the date of such termination, and only to the
extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of such termination, and to the extent that the Optionee does not
exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
 
     (c) Disability of Optionee. In the event Optionee's Continuous Status as a
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but
only within twelve (12) months following the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of termination, or if he or she does not exercise such Option (to the
extent otherwise so entitled) within the time specified herein, the Option shall
terminate.
 
     (d) Death of Optionee. In the event of an Optionee's death, the Optionee's
estate or a person who acquired the right to exercise the Option by bequest or
inheritance may exercise the Option, but only within twelve (12) months
following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
 
     9. NON-TRANSFERABILITY OF OPTIONS. Unless otherwise provided by the
Administrator, the Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Board makes an Option transferable, such
Option shall contain such additional terms and conditions as the Board deems
appropriate.
 
     10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER, ASSET
SALE OR CHANGE OF CONTROL.
 
     (a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting
 
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from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued Shares effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of Shares subject to an Option.
 
     (b) Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, to the extent that an Option has not been previously
exercised, it shall terminate immediately prior to the consummation of such
proposed action.
 
     (c) Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option may be assumed or an equivalent option may be
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation does not
agree to assume the Option or to substitute an equivalent option, each
outstanding Option shall become fully vested and exercisable, including as to
Shares as to which it would not otherwise be exercisable. If an Option becomes
fully vested and exercisable in the event of a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and the Option shall
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option shall be considered assumed if, following the merger or
sale of assets, the Option confers the right to purchase, for each Share of
Optioned Stock subject to the Option immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares).
 
     11. AMENDMENT AND TERMINATION OF THE PLAN.
 
     (a) Amendment and Termination. Except as set forth in Section 4, the Board
may at any time amend, alter, suspend, or discontinue the Plan, but no
amendment, alteration, suspension, or discontinuation shall be made which would
impair the rights of any Optionee under any grant theretofore made, without his
or her consent.
 
     (b) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated.
 
     12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all
purposes, be the date determined in accordance with Section 4 hereof.
 
     13. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder,
state securities laws, and the requirements of any stock exchange upon which the
Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
 
     As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares, if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
 
     Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
 
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     14. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
 
     15. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
 
     16. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company at or prior to the first annual
meeting of shareholders held subsequent to the granting of an Option hereunder.
Such shareholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
 
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