<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-K/A

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   For The Fiscal Year Ended December 31, 2000

                                       OR

    [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
                                 _____________.

                         COMMISSION FILE NUMBER: 0-27644

                        Digital Generation Systems, Inc.
             (Exact Name of Registrant as Specified in its Charter)

                Delaware                                   94-3140772
     (State or Other Jurisdiction of                   (I.R.S. Employer
     Incorporation or Organization)                  Identification Number)

                   750 West John Carpenter Freeway, Suite 700
                               Irving, Texas 75039
          (Address Of Principal Executive Offices, Including Zip Code)

                                 (972) 581-2000
              (Registrant's Telephone Number, Including Area Code)

                                 Not Applicable
(Former Name, Former Address, Former Fiscal Year, If Changed Since Last Report)

        Securities registered pursuant to Section 12(b) of the Act: None
  Securities registered pursuant to the Section 12 (g) of the Act: Common Stock
                                ($0.01 par value)

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months 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 the 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. [_]

  The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 15,
2001, as reported on the Nasdaq National Market, was approximately $140,312,000.
Shares of Common Stock held by each officer and director of the registrant and
by each person who may be deemed to be an affiliate have been excluded. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

  As of March 15, 2001, the registrant had 70,156,000 shares of Common Stock
outstanding.

================================================================================

<PAGE>

                                 Amendment No. 2

  The undersigned Registrant hereby amends Part II, Item 6 to read as follows:

                                     PART II

ITEM 6.  SELECTED FINANCIAL DATA

  The following selected historical consolidated financial data should be read
in conjunction with DG Systems' consolidated financial statements and related
notes and DG Systems' "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statement of operations
data for each of the three years ended December 31, 1998, 1997 and 1996 and the
consolidated balance sheet data at December 31, 1998, 1997 and 1996 are derived
from the consolidated financial statements of DG Systems, which have been
audited by Arthur Andersen LLP, independent public accountants. The consolidated
statement of operations data for the years ended December 31, 2000 and 1999 and
the consolidated balance sheet data at December 31, 2000 and 1999 is derived
from the consolidated financial statements of DG Systems, which were audited by
KPMG LLP, independent public accountants.


                                        1

<PAGE>

<TABLE>
<CAPTION>
                                                                           Years ended December 31,
                                                   ----------------------------------------------------------------------
Statement of Operations:                                     2000          1999          1998          1997          1996
                                                             ----          ----          ----          ----          ----
                                                                       (in thousands, except per share amounts)
<S>                                                <C>                <C>           <C>           <C>           <C>
Revenues                                                  $54,711        48,724        41,270        29,175        10,523
                                                   ----------------------------------------------------------------------

Costs and expenses:
    Delivery and material costs                            13,966        17,857        14,630        11,334         3,084
    Customer operations                                    16,330        15,138        14,780        11,388         4,164
    Sales and marketing                                     4,448         4,818         4,970         4,417         3,998
    Research and development                                3,112         2,577         2,780         2,473         2,092
    General and administrative                              7,838         6,552         4,314         3,169         1,677
    Write-down of goodwill and fixed assets                     -             -        17,006             -             -
    Non-recurring charges                                       -           370             -             -             -
    Depreciation and amortization                           7,095         8,591        10,266         9,306         4,331
                                                   ----------------------------------------------------------------------
    Total expenses                                         52,789        55,903        68,746        42,087        19,346
                                                   ----------------------------------------------------------------------

Income (loss) from operations                               1,922        (7,179)      (27,476)      (12,912)       (8,823)
Other income (expense):
    Interest and other income, net                            134           319           253           744         1,422
    Interest expense                                         (900)       (1,903)       (3,014)       (2,607)       (1,726)
                                                   ----------------------------------------------------------------------
Net income (loss)                                         $ 1,156        (8,763)      (30,237)      (14,775)       (9,127)
                                                   ======================================================================

Basic and diluted net loss applicable to
common shareholders                                       $ (0.03)        (0.33)        (1.97)        (2.52)        (0.87)
                                                   ======================================================================

Weighted average common and
common share equivalents outstanding:
    Basic and diluted                                      28,103        26,653        16,272        11,893        10,488
                                                   ======================================================================

<CAPTION>
Balance Sheet Data:
                                                                                December 31,
                                                         ---------------------------------------------------------------
                                                               2000        1999        1998        1997         1996
                                                            -------      ------      ------      ------       ------
                                                                               (in thousands)
    <S>                                                     <C>          <C>         <C>         <C>          <C>
    Cash, cash equivalents and short term investments       $ 3,539       5,420      13,025       8,820       20,597
    Working capital                                           7,513       1,236       7,178        (879)      14,200
    Property and equipment, net                               6,066       8,158      11,745      17,566       12,630
    Total assets                                             36,387      41,766      49,792      60,697       45,248
    Long-term debt, net of current portion                    1,729       2,513       9,307      11,847        8,495
    Shareholders' equity                                     24,185      20,553      23,710      30,449       26,839
</TABLE>

                                        2

<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                      DIGITAL GENERATION SYSTEMS, INC.


Dated:  December 31, 2001             By: /s/  MATTHEW E. DEVINE
                                          ----------------------
                                          Matthew E. Devine
                                          Chief Executive Officer


                               POWER OF ATTORNEY

  Pursuant to the requirements of 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.

<TABLE>
<CAPTION>
Signature                                                      Title                                    Date
---------                                                      -----                                    ----
<S>                                           <C>                                                 <C>
/s/  SCOTT K. GINSBURG                               Chairman of the Board                        December 31, 2001
---------------------------------------      and Director (Principal Executive Officer)
Scott K. Ginsburg


         *                                           Chief Executive Officer                      December 31, 2001
---------------------------------------
Matthew E. Devine                                           and Director


         *                                      Chief Financial Officer and Director              December 31, 2001
---------------------------------------    (Principal Financial and Accounting Officer)
Omar A. Choucair


         *                                           Chief Operating Officer                      December 31, 2001
---------------------------------------
Dan. F. Dent


         *                                                    Director                            December 31, 2001
---------------------------------------
David M. Kantor


         *                                                    Director                            December 31, 2001
---------------------------------------
Lawrence D. Lenihan, Jr.


         *                                                    Director                            December 31, 2001
---------------------------------------
Cappy McGarr
</TABLE>

                                        3

<PAGE>

<TABLE>
<CAPTION>
Signature                                                      Title                                    Date
---------                                                      -----                                    ----
<S>                                                           <C>                                  <C>
               *                                              Director                            December 31, 2001
---------------------------------------
Jeffrey A. Dankworth


               *                                              Director                            December 31, 2001
---------------------------------------
Eric L. Bernthal


               *                                              Director                            December 31, 2001
---------------------------------------
Robert J. Schlegel

               *                                              Director                            December 31, 2001
---------------------------------------
Kevin Howe
</TABLE>
*By: /s/ Scott K. Ginsburg
    -----------------------------------
     Attorney-in-Fact

                                        4

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

<TABLE>
<S>                                                                                                                <C>
Independent Auditors' Report.................................................................................      F-2
Report of Independent Public Accountants.....................................................................      F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999.................................................      F-4
Consolidated Statements of Operations for the three years ended December 31, 2000............................      F-5
Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2000..................      F-6
Consolidated Statements of Cash Flows for the three years ended December 31, 2000............................      F-7
Notes to Consolidated Financial Statements...................................................................      F-8
</TABLE>

                                     F - 1

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES
                         INDEPENDENT AUDITORS' REPORT

The Board of Directors
Digital Generation Systems, Inc.:

   We have audited the accompanying consolidated balance sheets of Digital
Generation Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended.  In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule as listed at Item 14(a)2 for the years ended December 31, 2000 and
1999. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Digital
Generation Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States
of America.  Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.


                                        KPMG LLP

Dallas, Texas
February 15, 2001

                                     F - 2

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Digital Generation Systems, Inc.:

  We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Digital Generation Systems, Inc. (a
California Corporation) and subsidiaries for the year ended December 31, 1998.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Digital
Generation Systems, Inc. and subsidiaries for the year ended December 31, 1998,
in conformity with generally accepted accounting principles.

  Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
Information included in this schedule for the year ended December 31, 1998 has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

                                      ARTHUR ANDERSEN LLP

San Francisco, California
January 26, 1999

                                     F - 3

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)


<TABLE>
<CAPTION>
                                                                           December 31,               December 31,
                                                                              2000                       1999
                                                                    ------------------------- -------------------------
ASSETS
<S>                                                                 <C>                       <C>
CURRENT ASSETS:
      Cash and cash equivalents                                            $  3,539                    $  5,420
      Accounts receivable (less allowance for doubtful
      accounts of $2,907,000 in 2000 and $1,659,000 in 1999)                 12,874                      12,799
      Prepaid expenses and other                                              1,573                       1,717
                                                                    ---------------              --------------
            Total current assets                                             17,986                      19,936
                                                                    ---------------              --------------

PROPERTY AND EQUIPMENT, at cost:
      Network equipment                                                      38,836                      35,304
      Office furniture and equipment                                          6,514                       5,833
      Leasehold improvements                                                    860                         793
                                                                    ---------------              --------------
                                                                             46,210                      41,930
      Less - Accumulated depreciation and amortization                      (40,144)                    (33,772)
                                                                    ---------------              --------------

            Property and equipment, net                                       6,066                       8,158
                                                                    ---------------              --------------

GOODWILL AND OTHER ASSETS, net                                               12,335                      13,672
                                                                    ---------------              --------------
            Total assets                                                   $ 36,387                   $  41,766
                                                                    ===============              ==============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
      Accounts payable                                                     $  3,019                   $   7,781
      Accrued liabilities                                                     3,571                       3,230
      Current portion of long-term debt                                       3,883                       7,689
                                                                    ---------------              --------------
            Total current liabilities                                        10,473                      18,700
                                                                    ---------------              --------------

LONG-TERM DEBT, net of current portion                                        1,729                       2,513
                                                                    ---------------              --------------

SHAREHOLDERS' EQUITY:
      Convertible preferred stock, no par value - -
            Authorized -- 15,000,000 shares
            Issued -- none                                                        -                           -
      Common stock, no par value --
            Authorized -- 100,000,000 shares;
            28,258,786 issued and 28,235,869 outstanding at
            December 31, 2000 and 27,530,170 issued and
            outstanding at December 31, 1999                                123,939                     119,519
      Treasury Stock, at cost                                                  (101)                          -
      Receivables from issuance of common stock                                 (93)                       (194)
      Accumulated deficit                                                   (99,638)                    (98,824)
      Accumulated other comprehensive income                                     78                          52
                                                                    ---------------              --------------
            Total shareholders' equity                                       24,185                      20,553
                                                                    ---------------            ----------------
            Total liabilities and shareholders' equity                     $ 36,387                   $  41,766
                                                                    ===============            ================

</TABLE>

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

                                      F-4

<PAGE>

              DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)



<TABLE>
<CAPTION>
                                                                       For the years ended December 31,
                                                         ---------------------------------------------------
                                                              2000               1999              1998
                                                         --------------      ------------      -------------
<S>                                                      <C>                <C>                <C>
REVENUES                                                        $54,711           $48,724          $  41,270
                                                         --------------      ------------       ------------
  COSTS AND EXPENSES:
      Delivery and material costs                                13,966            17,857             14,630
      Customer operations                                        16,330            15,138             14,780
      Sales and marketing                                         4,448             4,818              4,970
      Research and development                                    3,112             2,577              2,780
      General and administrative                                  7,838             6,552              4,314
      Write-down of goodwill and fixed assets                         -                 -             17,006
      Non-recurring charges                                           -               370                  -
      Depreciation and amortization                               7,095             8,591             10,266
                                                         --------------      ------------       ------------
      Total expenses                                             52,789            55,903             68,746
                                                         --------------      ------------       ------------

INCOME (LOSS) FROM OPERATIONS                                     1,922            (7,179)           (27,476)

OTHER INCOME (EXPENSE):
      Interest and other income, net                                134               319                253
      Interest expense                                             (900)           (1,903)            (3,014)
                                                         --------------      ------------       ------------

NET INCOME (LOSS)                                                 1,156            (8,763)           (30,237)



BASIC AND DILUTED NET LOSS
APPLICABLE TO COMMON SHAREHOLDERS                              $  (0.03)          $ (0.33)         $   (1.97)
WEIGHTED AVERAGE COMMON AND COMMON
SHARES OUTSTANDING:
      BASIC AND DILUTED                                          28,103            26,653             16,272
                                                         ==============      ============       ============
</TABLE>



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

                                      F-5

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                (In thousands)

<TABLE>
<CAPTION>

                              Convertible                                                   Receivable
                            Preferred Stock        Common Stock      Treasury Stock          from
                            ---------------        ------------      --------------        Issuance of
                                                                                             Common
                            Shares   Amount        Shares   Amount    Shares  Amount         Stock
                            ------  ------        ------    ------    ------  ------        --------
<S>                         <C>     <C>           <C>       <C>       <C>     <C>          <C>
BALANCE AT DECEMBER
31, 1997                      4,950  31,561         12,123  57,123        -       -             (175)
     Conversion of
     Series A
     preferred stock
     to Common Stock,
     net of issuance
     costs of $486           (4,950)(31,561)         4,950  31,075        -       -                -

     Preferred stock
     deemed dividend
     resulting from
     conversion of
     Series A
     preferred stock              -       -            495   1,764        -       -                -
     Issuance of
     common stock in
     private placements,
     net of issuance
     costs of $370                -       -          8,432  23,480        -       -                -
     Warrants issued
     in relation to
     common stock
     private placement            -       -              -      12        -       -                -

     Issuance of
     restricted stock
     for promissory
     note                         -       -             50     194        -       -             (194)
     Exercise of stock
     options                      -       -            165     371        -       -                -
     Stock issued for
     services                     -       -             10      80        -       -                -
     Purchase of
     shares through
     ESPP                         -       -             14      32        -       -                -
     Foreign currency
     translation
     adjustment                   -       -                               -       -                -
     Net loss
                                  -       -                               -       -                -
                              -------------       ----------------  ---------------       ----------
BALANCE AT DECEMBER
31, 1998                          -       -         26,239 114,131        -       -             (369)

     Issuance of
     common stock in
     private placement            -       -            725   3,750        -       -                -

     Exercise of
     warrants                     -       -             12       -        -       -                -
     Forgiveness of
     promissory note              -       -              -       -        -       -              175
     Exercise of stock
     options                      -       -            508   1,518        -       -                -
     Purchase of
     shares through
     ESPP                         -       -             46     120        -       -                -
     Foreign currency
     translation
     adjustment                   -       -              -       -        -       -                -

     Net loss                     -       -              -       -        -       -                -
                              -------------       ----------------  ---------------       ----------
BALANCE AT DECEMBER
31, 1999                          -       -         27,530 119,519        -       -             (194)

     Treasury stock
     Exercise of stock            -       -              -       -       23    (101)             101
     options                      -       -            681   2,291        -       -                -
     Increase in fair
     value of warrants
     due to change in
     measurement date             -       -              -   1,970        -       -                -
     Purchase of
     shares through
     ESPP                         -       -             48     159        -       -                -
     Foreign currency
     translation
     adjustment                   -       -              -       -        -       -                -

     Net income                   -       -              -       -        -       -                -
                              -------------       ----------------  ---------------       ----------
BALANCE AT DECEMBER
31, 2000                          -       -         28,259 123,939       23    (101)             (93)
                              =============       ================  ===============       ==========
<CAPTION>

                            Accumulated
                               Other                                       Total
                           Comprehensive         Accumulated           Shareholders'       Comprehensive
                              Income              Deficit                 Deficit          Income (Loss)
                              ------              -------                 -------          ------------
<S>                         <C>                 <C>                    <C>                <C>
BALANCE AT DECEMBER
31, 1997                            -             (58,060)                  30,449
     Conversion of
     Series A
     preferred stock
     to Common Stock,
     net of issuance
     costs of $486                  -                   -                     (486)               -

     Preferred stock
     deemed dividend
     resulting from
     conversion of
     Series A
     preferred stock                -              (1,764)                       -                -
     Issuance of
     common stock in
     private placements,
     net of issuance
     costs of $370                  -                   -                   23,480                -
     Warrants issued
     in relation to
     common stock
     private placement              -                   -                   12                    -

     Issuance of
     restricted stock
     for promissory
     note                           -                   -                        -                -
     Exercise of stock
     options                        -                   -                      371                -
     Stock issued for
     services                       -                   -                       80                -
     Purchase of
     shares through
     ESPP                           -                   -                       32                -
     Foreign currency
     translation
     adjustment                     9                   -                        9                9
     Net loss
                                    -             (30,237)                 (30,237)         (30,237)
                            ---------            --------             ------------        ---------
BALANCE AT DECEMBER
31, 1998                            9             (90,061)                  23,710          (30,228)
                                                                                          =========
     Issuance of
     common stock in
     private placement              -                   -                    3,750

     Exercise of
     warrants                       -                   -                        -
     Forgiveness of
     promissory note                -                   -                      175
     Exercise of stock
     options                        -                   -                    1,518
     Purchase of
     shares through
     ESPP                           -                   -                      120
     Foreign currency
     translation
     adjustment                    43                   -                       43               43

     Net loss                       -              (8,763)                  (8,763)          (8,763)
                            ---------            --------             ------------        ---------
BALANCE AT DECEMBER
31, 1999                           52             (98,824)                  20,553           (8,720)
                                                                                             ======
     Treasury stock                 -                   -                        -
     Exercise of stock
     options                        -                   -                    2,291
     Increase in fair
     value of warrants
     due to change in
     measurement date               -              (1,970)                       -
     Purchase of
     shares through
     ESPP                           -                   -                      159
     Foreign currency
     translation
     adjustment                    26                   -                       26               26

     Net income                     -               1,156                    1,156            1,156
                            ---------            --------             ------------        ---------
BALANCE AT DECEMBER
31, 2000                           78             (99,638)                  24,185            1,182
                            =========            ========             ============        =========
</TABLE>


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

                                      F-6

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                         For the Years Ended December 31,
                                                                                         --------------------------------
                                                                                   2000               1999               1998
                                                                           -------------------------------------------------------
<S>                                                                        <C>                     <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                                 1,156            (8,763)           (30,237)
    Adjustments to reconcile net income (loss) to net cash provided by
    (used in) operating activities:
          Depreciation and amortization of property and equipment                     6,377             8,106              9,103
          Amortization of goodwill and intangibles                                      718               486              1,163
          Write-down of goodwill and fixed assets                                         -                 -             17,006
          Common stock issued for services                                                -                 -                 80
          Provision for doubtful accounts                                             1,412               538              1,142
          Loss on retirement of property and equipment                                    6                 -                  -
          Changes in operating assets and liabilities --

             Accounts receivable                                                     (1,487)           (3,512)            (1,953)

             Prepaid expenses and other assets                                          789              (659)              (213)
             Accounts payable and accrued liabilities                                (4,421)            3,957               (882)
                                                                           ---------------- ----------------- ------------------
                Net cash provided by (used in) operating activities                   4,550               153             (4,791)
                                                                           ---------------- ----------------- ------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                                               (2,719)           (2,653)            (2,162)
    Proceeds from sale of property and equipment                                          -                75                  -
    Purchases of short-term investments                                                   -                 -             (2,013)
    Maturities of short-term investments                                                  -                 -              3,000
    Acquisition of DCI                                                                    -                 -             (9,131)
                                                                           ---------------- ----------------- ------------------
                Net cash used in investing activities                                (2,719)           (2,578)           (10,306)
                                                                           ---------------- ----------------- ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of common stock                                            2,450             5,563             23,975
    Costs of converting preferred stock to common stock                                   -                 -               (486)
    Proceeds from line of credit                                                     43,473             1,148             13,365
    Payments on line of credit                                                      (41,873)           (2,581)           (14,767)
    Proceeds from issuance of long-term debt                                              -                 -              5,233
    Payments on long-term debt                                                       (7,762)           (9,308)            (7,106)
                                                                           ---------------- ----------------- ------------------
                Net cash provided by (used in) financing activities                  (3,712)           (5,178)            20,214
                                                                           ---------------- ----------------- ------------------


EFFECT OF EXCHANGE RATE CHANGES                                                           -                (2)                75

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 (1,881)           (7,605)             5,192

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      5,420            13,025              7,833
                                                                           ---------------- ----------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      $     3,539       $     5,420        $    13,025
                                                                           ================ ================= ==================

SUPPLEMENTAL CASH FLOW INFORMATION:
    Interest paid                                                               $       938       $     2,199        $     2,777
                                                                           ================ ================= ==================
</TABLE>

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

                                      F-7

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  The Company:

   Digital Generation Systems, Inc. (the "Company") was incorporated in 1991.
The Company operates a nationwide multimedia network designed to provide media
distribution and related services to the broadcast industry by linking content
providers to radio and television stations. The Company is primarily a provider
of electronic and physical distribution of audio and video spot advertising to
radio and television stations. The Company primarily generates its revenues from
advertising agencies and production studios.

   The Company is subject to certain risks that include, but are not limited
to: the continued development of technology to enhance the delivery and variety
of the Company's services in the most cost-effective manner, including the
successful integration of the operations of its subsidiaries; the ability to
compete successfully against current and future competitors; and dependence on
key personnel and the need for additional financing to fund its capital
expenditure requirements. The Company obtains certain components used in the
assembly of the units which are placed at radio and television stations and
production studios from a few single or limited source suppliers and obtains its
primary long distance telephone access through an exclusive contract with a
telephone service provider which expires in 2002. Any material interruption in
these services could have a material adverse effect on the Company's business.
Although the Company believes that alternate vendors can be obtained, the
transition to alternative vendors could have a material adverse impact on the
Company's costs and shipping schedules.

2.  Summary of Significant Accounting Policies:

Consolidation

   The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.

Use of Estimates

   The preparation of 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 reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Foreign Currencies

   Assets and liabilities of the Company's foreign subsidiary are translated at
the exchange rate on the balance sheet date. Revenue, costs and expenses are
translated at average rates of exchange prevailing during the year. Translation
adjustments resulting from this process are included in other comprehensive
income. Gains (losses) on foreign currency transactions of approximately
($10,000), ($28,000) and $10,000 for the years ended December 31, 2000, 1999 and
1998, respectively, are included in interest income and other, net in the
consolidated statements of operations.

Research and Development

   Research and development costs are charged to expense as incurred.

                                      F-8

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill

   Goodwill, which represents the excess of purchase price over the fair value
of net identifiable assets acquired, is amortized on a straight-line basis over
the expected periods to be benefited, generally 20 years. Accumulated
amortization of goodwill at December 31, 2000 and 1999 was $3.2 million and $2.5
million, respectively. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved. In 1998, the Company recorded a goodwill impairment
of $16.7 million related to a previous acquisition.

Impairment of Long-Lived Assets

   Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset.  If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.  Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

Cash and Cash Equivalents

   Cash and cash equivalents consist of liquid investments with original
maturities of three months or less.  As of December 31, 2000 and 1999, cash
equivalents consist principally of U.S. Treasury Bills.

Property and Equipment

   Network equipment includes the network operating center, record send
terminals, receive playback terminals, video record transmission systems,
digital video playback systems and the related terminal and system components as
well as audio and video taping and dubbing equipment. The Company records its
property and equipment at cost and depreciates it on a straight-line basis over
its estimated useful life, generally three years.  Equipment held under capital
leases and leasehold improvements are amortized straight-line over the shorter
of the lease term or estimated useful life of the asset.

   The cost of equipment under capital lease at December 31, 2000 and 1999 was
$15,893,000 and $14,321,000, respectively. Related accumulated depreciation at
December 31, 2000 and 1999 was $14,041,000 and $10,135,000, respectively.

Revenue Recognition

   Revenues for distribution services which are digitally transmitted are
recognized for each transaction on the date audio, video or related information
is successfully transmitted from the Company's operating facilities to the
destination ordered.  Revenues for distribution services of analog audio or
videotapes are recognized as the tapes are shipped.

Income Taxes

   Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

                                      F-9

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Option Plans

   The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for its fixed
plan stock options.  As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price.  SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans.  As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic value-
based method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.

Financial Instruments and Concentration of Credit Risk

   Financial instruments that potentially subject the Company to a concentration
of credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company believes that a concentration of credit risk with
respect to accounts receivable is limited because its customers are
geographically dispersed and the end users (the customer's clients) are
diversified across industries. The Company's receivables are principally from
advertising agencies, dub and ship houses, and syndicated programmers. The
Company's revenues are not contingent on its customers' sales or collections.
However, the timing of collections from its customers is affected by the billing
cycle in which the customer bills its end-users (the customer's clients). The
Company provides reserves for credit losses.

   The carrying values of accounts receivable and accounts payable approximate
fair value due to their short maturities.  The carrying value of long-term debt
approximates fair value due to the variable rate of interest.

Supplemental Cash Flow Information

   Non-cash investing and financing activities for 2000, 1999 and 1998 consisted
of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                         -------------------------------------------------
                                                                                2000              1999          1998
                                                                         -----------          -----------       ----
<S>                                                                    <C>                  <C>              <C>
Property and equipment financed with capital lease obligations....          $  1,572          $  1,977         $   1,663
Preferred stock deemed dividend...................................                --                --             1,764
Conversion of preferred stock to common stock.....................                --                --            31,561
Common stock issued for services..................................                --                --                80
</TABLE>

3.   Acquisition:

     On September 25, 1998, the Company acquired substantially all of the
property and assets of Digital Courier International, Inc. ("DCI"), including
all accounts receivable, inventories, contracts, equipment, real property leases
and other related assets. DCI is in the business of supplying electronic
distribution and communications services for the radio broadcast industry in the
United States and Canada.

     The Company paid $13.5 million in Canadian dollars (approximately US $9.06
million) for DCI. The DCI acquisition was accounted for as a purchase. The
excess of purchase price and acquisition costs over the fair value of assets
acquired of approximately $6.2 million is included in Goodwill and Other Assets
in the accompanying consolidated balance sheets, and is being amortized over a
twenty year period. The operating results of DCI have been included in the
consolidated results and balances of the Company from the date of the closing of
the transaction.

                                     F-10

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.  Accrued Liabilities:

    Accrued liabilities consist of the following (in thousands):

                                                          December 31,
                                                   -----------------------
                                                      2000        1999
                                                   ----------- -----------
               Telecommunications costs...........    $  514      $    4
               Employee compensation..............       933       1,115
               Legal and professional fees........       341         135
               Other..............................     1,783       1,976
                                                      ------      ------
                                                      $3,571      $3,230
                                                      ======      ======
5.  Commitments and Contingencies:

   The Company leases its facilities and certain equipment under non-cancelable
capital and operating leases. At December 31, 2000, future minimum annual
payments under capital leases are $3,787,000 in 2001 and $130,000 in 2002. The
present value of obligations under capital lease was $3,868,000, of which
$3,739,000 is classified as a current liability. As of December 31, 2000, future
minimum annual payments under operating leases are as follows: 2001 -$1,435,000;
2002 -$936,000; 2003 - $844,000; 2004 - $462,000; 2005 - $449,000 and
thereafter - $449,000.

   Rent expense totaled approximately $1,587,000, $1,432,000 and $1,391,000 in
2000, 1999 and 1998, respectively.

   As of December 31, 2000, the Company had non-cancelable future minimum
purchase commitments with its primary telephone service provider. These
commitments total $3.6 million per year and extend through December 2002.

   The Company is subject to legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business from time to time.
While the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of the pending legal matters will have
a material adverse effect on the Company's results of operations, financial
position or liquidity.

6. Related Party Transactions

   During 2000, the Company charged approximately $342,000 to StarGuide Digital
Networks, Inc. ("StarGuide", a related company) for shared costs related to
shared office space, common utilities and equipment and was charged $658,000 by
StarGuide for payroll, insurance and travel costs related to shared employees.
At December 31, 2000, the Company had a net payable to StarGuide of
approximately $443,000.

7. Long-Term Debt:

During April 2000, the Company entered into a revolving credit facility
providing borrowings up to a maximum of $11 million.  The credit facility is
secured primarily by accounts receivable and has a term of three years.  The
amount available to the Company is based on eligible receivables less
outstanding letters of credit, as defined in the revolving credit facility
agreement. The interest rate on advances is the bank's reference rate,
approximately equal to prime, plus 1.50% (11.0% at December 31, 2000). As of
December 31, 2000, $1.6 million was outstanding under the revolving credit
facility and an additional $3.2 million was available for borrowing.

   The Company has occasionally used long-term debt to finance purchases of
property and equipment.  At December 31, 2000, $144,000 of related long-term
debt was outstanding, all of which is current.

                                     F-11

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Capital Stock:

   In July and August 1998, the Company's Board of Directors authorized the
issuance of up to $ 13.0 million of Common Stock in a private placement
transaction. The Company issued 4,589,287 common shares to institutional and
closely associated investors at $2.80 per share. Proceeds to the Company, net of
issuance costs, was approximately $12.7 million.

   In December 1998, the Company's Board of Directors authorized the issuance of
up to $11.0 million of Common Stock in a private placement transaction. The
Company issued 2,920,134 common shares to Scott Ginsburg, the Company's Chief
Executive Officer, at $3.25 per share. In addition, the Company authorized the
sale and issuance of up to $3.0 million of Common Stock in a private placement
transaction. The Company issued 923,078 common shares to institutional and
closely associated investors at a price of $3.25 per share.

   In December 1999, the Company's Board of Directors authorized the issuance of
Common Stock in a private placement transaction.  The Company issued 725,199
common shares to institutional and closely associated investors at a price of
$5.17 per share.

   In December 1999, the Company wrote off a note receivable from an executive
officer in the amount of $175,000 that was issued in connection with a
restricted stock purchase agreement, pursuant to which the executive officer
purchased an aggregate of 487,500 shares of the Company's Common Stock.  A
charge to expense of $175,000 was recorded in 1999 for this transaction.

   The Company and an employee were parties to a restricted stock purchase
agreement, pursuant to which the Company loaned the employee money under a
nonrecourse note and the employee purchased an aggregate of 50,000 shares of the
Company's Common Stock. During 2000, the Company exercised its right to
repurchase 22,917 of these restricted shares, within the terms of the stock
purchase agreement, in exchange for forgiveness of the portion of the note
subject to the stock purchase agreement.  The transaction was accounted for as a
purchase of treasury stock.

Series A Convertible Preferred Stock

   During 1997, the Company issued 4,950,495 shares of Series A Convertible
Preferred Stock (the "Series A Preferred"). In July 1998, the Series A Preferred
Stock was converted to Common Stock per the terms of the Series A Preferred
Stock Conversion Agreement effective August 14, 1998.  The conversion of the
Series A Preferred Stock to Common Stock resulted in a deemed dividend to the
preferred shareholders and increased the loss attributable to common
shareholders in the computation of basic and diluted earnings per share for the
year ended December 31, 1998.

Warrants

   The Company has issued warrants in connection with certain financing and
leasing transactions and Common Stock offerings.  All of the outstanding
warrants are convertible into Common Stock.  A summary of outstanding warrants
at December 31, 2000, 1999 and 1998 and changes during the years then ended
follows:

<TABLE>
<CAPTION>
                                                       2000                          1999                          1998
                                           -------------------------   ----------------------------   --------------------------
                                                          Wtd Avg Ex                    Wtd Avg Ex                    Wtd Avg Ex
                                            Warrants        Price        Warrants          Price         Warrants       Price
                                           -----------  ------------   ------------   -------------   -------------  ------------
<S>                                      <C>          <C>            <C>            <C>             <C>            <C>
Oustanding at beginning of the year         3,891,070       $   3.57      3,962,244        $   3.55         492,177     $    5.69
Granted                                             -              -              -               -       3,470,067          3.25
Exercised                                           -              -        (71,174)           2.70               -             -
                                           -----------  ------------   ------------   -------------   -------------  ------------
Outstanding at end of the year              3,891,070       $   3.57      3,891,070        $   3.57       3,962,244     $    3.55
                                           ===========  ============   ============   =============   =============  ============
</TABLE>

                                     F-12

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   The warrants outstanding at December 31, 2000 expire on various dates from
2001 through 2006. The warrants exercised in 1999 were done by exchanging the
entire warrant for shares of Common Stock equal to the net value of the warrant.
Certain of the warrants issued to investors had performance hurdles that were
required to be met in order for the warrants to become exercisable. In 2000,
these performance hurdles were removed, resulting in a new measurement date for
accounting purposes. A charge to accumulated deficit of $1,970,000 was
recognized for the increase in fair value associated with the modified warrants.

9. Stock Plans:

   The Company has three Stock Option Plans:

1992 Stock Option Plan

   Under the Company's 1992 Stock Option Plan, (the "1992 Plan"), the Company
may issue up to 14,950,000 shares of Common Stock to employees, officers,
directors and consultants. The exercise price and terms of the options granted
are determined by the Board of Directors, provided that such price cannot be
less than the fair value of the Common Stock on the date of grant for incentive
stock options or, in the case of non-statutory options, less than 85 percent of
the fair value of the Common Stock on the date of grant. The options generally
vest over four years. The 1992 Plan provides that, in the event of a change in
control of the Company, executive officers of the Company will receive
accelerated vesting for a portion of their unvested option shares. The term of
the options granted is seven years. No options have been granted at less than
fair value under this plan.

1996 Supplemental Option Plan

   In 1996, the Company's Board of Directors adopted the 1996 Supplemental
Option Plan. Under this plan, the Company may issue up to 750,000 shares of
Common Stock to employees, officers, directors and consultants. The exercise
price and terms of the options granted are determined by the Board of Directors.
The options generally vest over four years. The term of the options granted is
seven years.

1995 Director Option Plan

   In 1995, the Company's Board of Directors adopted the 1995 Director Option
Plan (the "Director Plan"). A total of 300,000 shares of Common Stock has been
reserved for issuance under the Director Plan. The Director Plan provides that
each future non-employee director of the Company will be automatically granted
an option to purchase 10,000 shares of Common Stock (the "First Option") on the
date on which the optionee first becomes a non-employee director of the Company
and an additional option to purchase 2,500 shares of Common Stock (the
"Subsequent Option") on each anniversary date thereafter. The exercise price per
share of all options granted under the Director Plan shall be equal to the fair
market value of a share of the Company's Common Stock on the date of grant.
Shares subject to the First Option vest over 36 months, and the Subsequent
Option shares vest over 12 months beginning with the month following the second
anniversary of its date of grant. The term of the options granted is ten years.

Accounting for Stock Option Compensation Expense

   The Company applies the principles of APB Opinion No. 25 and related
interpretations in accounting for the its stock option plans. Had compensation
cost for the Company's stock option plans been determined based on the fair
value at the date of grant of the stock options consistent with the method of
SFAS No. 123, the Company's net income (loss) (in thousands) and net income
(loss) per share would have been reduced to the pro forma amounts indicated
below:

                                     F-13

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           2000           1999             1998
                                                                         -------        --------         --------
<S>                                                                      <C>            <C>              <C>
Net Income (Loss)                                As Reported             $ 1,156        $ (8,763)        $(30,237)
                                                 Pro Forma               $(2,605)       $(11,689)        $(32,409)

Basic and diluted net income (loss) per share    As Reported             $ (0.03)       $  (0.33)        $  (1.97)
                                                 Pro Forma               $ (0.09)       $  (0.44)        $  (2.10)
</TABLE>

  The fair value of each option grant is estimated on the date of grant using
the multiple option approach of the Black-Scholes option pricing model with the
following assumptions used for grants in 2000, 1999 and 1998, respectively;
risk-free interest rates of 6.4%, 6.4% and 4.7%; a dividend yield of 0%;
expected life of five years; and volatility factors of the expected market price
of the Company's Common Stock of 113%, 112% and 194%.

  A summary of the Company's fixed plan stock options at December 31, 2000, 1999
and 1998 and changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                             2000                       1999                         1998
                                  -------------------------   --------------------------  -------------------------
                                                 Wtd Avg Ex                  Wtd Avg Ex                  Wtd Avg Ex
                                    Shares         Price        Shares         Price        Shares         Price
                                  ----------     ----------   ----------     ----------   ----------     ----------
<S>                               <C>            <C>          <C>            <C>          <C>            <C>
Oustanding at beginning of the
 year                              4,030,839     $     4.36    3,087,031     $     3.78    2,682,707     $     4.21
Granted                              498,501           5.46    2,024,500           4.95    1,270,250           3.12
Exercised                           (680,880)          3.36     (507,686)          2.99     (164,701)          2.25
Canceled                            (420,852)          4.06     (573,006)          4.50     (701,225)          4.61
                                  ----------     ----------   ----------     ----------   ----------     ----------
Outstanding at end of the year     3,427,608     $     4.78    4,030,839     $     4.36    3,087,031     $     3.78
                                  ==========     ==========   ==========     ==========   ==========     ==========
Exercisable at end of the year     1,671,426     $     4.53    1,262,767     $     3.90    1,159,767     $     3.79
Weighted average fair value of
 options granted                                 $     4.63                  $     3.55                  $     2.85
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                              Options Outstanding                                                      Options Exercisable
------------------------------------------------------------------------------------------        -----------------------------
                                                     Weighted-Average        Weighted-                             Weighted-
                                Number                  Remaining             Average             Number            Average
Range of Exercise Prices      Outstanding            Contractual Life      Exercise Price       Exercisable      Exercise Price
------------------------      -----------            ----------------      --------------       -----------      --------------
<S>                           <C>                    <C>                   <C>                  <C>              <C>
$0.20 - $ 2.65                      167,089                4.54 years                $2.50           167,089               $2.50
$2.75 - $5.00                     1,247,637                4.59 years                $3.91           769,035               $4.10
$5.125 - $10.125                  2,012,882                5.40 years                $5.50           735,302               $5.44
                              -------------                                                        ---------
$0.20 - $10.125                   3,427,608                                                        1,671,426
                              =============                                                        =========
</TABLE>

  As of December 31, 2000, there were 10,792,583 shares available for future
grant under the stock option plans.

                                      F-14

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  Income Taxes:

  Net income for the year ended December 31, 2000 will be offset by net
operating losses, therefore no tax expense has been provided. There was no
income tax expense (benefit) in 1999 or 1998 due to the existence of net
operating losses and a full valuation allowance for related deferred tax assets.

  Components of deferred tax assets at December 31, 2000 and 1999 are as follows
(in thousands):

                                                       2000        1999
                                                     --------    ---------
             Net operating loss carryforwards        $ 14,297    $  16,992
             Cumulative temporary differences           6,366        3,841
             Research and development credit              768          768
                                                     --------    ---------
             Total gross deferred tax asset            21,431       21,601
             Less valuation allowance                 (21,431)     (21,601)
                                                     --------    ---------
             Net deferred tax assets                 $    ---    $     ---
                                                     ========    =========

  The net operating loss and research and development credit carryforwards of
approximately $42 million and $768,000, respectively, will expire on various
dates from 2007 to 2019. Utilization of these carryforwards may be annually
limited if there is a change in the Company's ownership, as defined by the
Internal Revenue Code.

  A valuation allowance has been recorded for the entire deferred tax asset as a
result of uncertainties regarding the realization of the asset including the
lack of sustained profitability to date and the variability of operating
results.

11.  Net Income (Loss) Per Share:

  Under Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per
Share," the Company is required to compute earnings per share under two
different methods (basic and diluted). Basic earnings per share is calculated by
dividing net income (loss) attributable to common shareholders by the weighted
average shares of Common Stock outstanding during the period. Diluted earnings
per share is calculated by dividing net income attributable to common
shareholders by the weighted average shares of outstanding Common Stock and
Common Stock equivalents during the period. Due to losses for the years ended
December 31, 1999 and 1998, inclusion of Common Stock equivalents would be anti-
dilutive. Therefore, basic and diluted loss per share for the Company are the
same.

   For the year ended December 31, 2000, the net loss per share was computed
as net income of $1,156,000 less $1,970,000 related to a non pro rata
distribution to certain warrant holders (Note 8) divided by the weighted common
shares outstanding.

  For the year ended December 31, 1998, the net loss per share was computed as
net loss of $30,237,000 plus $1,764,000 relating to the preferred stock deemed
dividend (Note 8) divided by the weighted average common shares outstanding.

  A reconciliation of net income (loss) per basic and diluted share for the
three years ended December 31, 2000 follows (in thousands, except for per share
amounts):

                                      F-15

<PAGE>

               DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                  2000      1999       1998
                                                  ----      ----       ----
Basic:
    Net income (loss)                           $ 1,156   $(8,763)   $(30,237)

    Non pro rata distribution                    (1,970)        -      (1,764)
                                                -------   -------    --------

    Net loss applicable to common
    shareholders                                   (814)   (8,763)    (32,001)
                                                =======   =======    ========

    Weighted average shares outstanding          28,103    26,653      16,272
                                                -------   -------    --------
    Net loss per share                          $ (0.03)  $ (0.33)   $  (1.97)
                                                =======   =======    ========

Diluted:

    Net loss applicable to common
    shareholders                                $  (814)  $(8,763)   $(32,001)

    Weighted average shares outstanding          28,103    26,653      16,272
                                                -------   -------    --------
    Net loss per share                          $ (0.03)  $ (0.33)   $  (1.97)
                                                =======   =======    ========

12.  Segment Information:

  The Company operates in the media distribution industry and its operations are
managed primarily by geographic areas. The Company has defined its operating
segments based on these geographic areas.

  The information in the following tables is derived directly from the internal
financial reporting used for corporate management purposes and segments are
assessed based on net income (loss).The expenses, assets and liabilities
attributable to corporate activity are allocated to the San Francisco operating
segment. During 2000, the Vancouver operating facility was closed, with all
assets and activities integrated into San Francisco. As of December 31, 1999, 5%
of operating assets are located outside of the United States (none at December
31, 2000). At December 31, 1998, the balance sheet information for the Company's
Los Angeles segment was maintained as part of the Chicago segment and was
impractical to break out separately.

<TABLE>
<CAPTION>
                                                    Year ended December 31, 2000
                                                           (in thousands)
                            --------------------------------------------------------------------------
                              San Francisco   New York  Chicago   Los Angeles  Vancouver  Consolidated
                              -------------   --------  -------   -----------  ---------  ------------
<S>                           <C>             <C>       <C>       <C>          <C>        <C>
Revenue                         $   23,630    $  12,592   $15,344    $ 3,145     $     -   $   54,711

Net income (loss)               $   (6,802)   $   1,971   $ 5,582    $   405     $     -   $    1,156

Total assets                    $   24,038    $   8,929   $ 2,337    $ 1,083     $     -   $   36,387
</TABLE>

                                      F-16

<PAGE>

              DIGITAL GENERATION SYSTEMS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                      Year ended December 31, 1999
                                                           (in thousands)
                            ------------------------------------------------------------------------------
                              San Francisco   New York   Chicago    Los Angeles   Vancouver   Consolidated
                              -------------   --------   -------    -----------   ---------   ------------
<S>                         <C>               <C>        <C>        <C>           <C>         <C>
Revenue                        $   16,340     $ 12,037   $ 13,605     $  2,219      $   4,523   $   48,724

Net income (loss)              $  (12,458)    $  2,877   $  1,805     $    240      $  (1,227)  $   (8,763)

Total assets                   $   15,875     $ 10,081   $  4,943     $  1,996      $   8,871   $   41,766
</TABLE>

<TABLE>
<CAPTION>
                                                      Year ended December 31, 1998
                                                             (in thousands)
                            ------------------------------------------------------------------------------
                              San Francisco   New York   Chicago    Los Angeles   Vancouver   Consolidated
                              -------------   --------   -------    -----------   ---------   ------------
<S>                         <C>               <C>        <C>        <C>           <C>         <C>
Revenue                         $ 15,976       $10,125   $ 10,829    $  2,842      $   1,498    $   41,270

Net income (loss)               $(10,910)      $ 1,265   $(19,975)   $   (191)     $    (426)   $  (30,237)

Total assets                    $ 22,737       $10,060   $  7,514    $      -      $   9,481    $   49,792
</TABLE>

13.  Pretax Savings Plan:

  The Company has a 401(k) retirement plan for full-time U.S. based employees.
Employees who are at least 21 years of age and have completed at least six
months of service are eligible to participate in the plan. Employees may
contribute up to 20% of gross pay with a maximum dollar limit for 2000 of
$15,000. The employer contribution is made at the end of the plan year in an
amount set by corporate resolution, based on participants' compensation. The
Company made no contributions to the plan in 2000, 1999 or 1998.

14.  New Accounting Pronouncement:

  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended. This
new standard requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Under SFAS No. 133, gains or
losses resulting from changes in the values of derivatives are to be reported in
the statement of operations or in other comprehensive income, depending on the
use of the derivatives and whether they qualify for hedge accounting. The
Company is required to adopt SFAS No. 133 in the first quarter of 2001. The
Company does not engage in hedging activity and does not have any significant
derivatives. Accordingly, adoption of this new standard will not have a
significant impact on the Company.

15.  Merger:

  During October 2000, the Board of Directors of the Company unanimously
approved an Agreement and Plan of Merger, dated as of July 7, 2000, which
provided for the merger of SG Nevada Merger Sub Inc. ("SG Nevada"), a wholly-
owned subsidiary of the Company, with and into StarGuide. In this merger, the
holders of StarGuide common stock received for each share of StarGuide Common
Stock approximately 1.7332 shares of the Company's Common Stock and the holders
of Company Common Stock will continue to hold their shares. Final approval of
the merger was obtained at the annual meeting on November 21, 2000 and was
consummated effective January 1, 2001. SG Nevada ceased to exist as a separate
entity and StarGuide has continued as the surviving corporation and a wholly-
owned subsidiary of the Company. The merger has been accounted for as a reverse
acquisition, and accordingly, historical results of the combined company will be
that of StarGuide and the Company's results of operations will be included
subsequent to the consummation date.

                                      F-17