Chairman's Annual Report Letter - 2001

Dear Ampex Shareholder,

Last year, most of this letter was devoted to iNEXTV, the Internet video subsidiary that was started in 1999. With regret, in July of 2001, this operation was discontinued. The expenses of iNEXTV and the write-off of the investments in it accounted for the majority of the net loss of $22.4 million that Ampex reported for the year ending December 31, 2001.

While we continue to believe that the Internet video business was an excellent opportunity for Ampex to build on its video industry strengths, we made every effort to be forthright about the risks of entering this business. Anticipating early on that it would be unwise to count on the capital markets alone to finance iNEXTV, we decided to offer our Data Systems' subsidiary for sale in order to provide the required capital. We, and our outside advisors, were surprised that the initial price indications from potential buyers did not adequately reflect the value of Data Systems.  As the economy and stock market worsened last year, potential buyers were unwilling or unable to increase their offers, and the Board of Directors has now determined that a sale is not likely to be concluded on terms that are in the best interests of stockholders.  Therefore, Data Systems has been withdrawn from sale and its financial results are included in continuing operations. We intend to continue to operate Data Systems as a provider of mass data solutions for the broadcasting and government markets.

I think it is appropriate to recognize the progress made by the iNEXTV team in programming, technology and distribution. By May 2001, Jupiter Media Metrix, the leading Internet research firm, reported that iNEXTV had become the leading source of original Internet video 'infotainment' content in their survey.  As those of you who are frequent users of the Internet know, video content and advertising are continuing to grow.  However, Ampex cannot invest money that it does not have and we must move on.

After a profitable year in 2000, Data Systems reported an operating loss of $5.4 million in 2001.  The Company's two major end-use markets, broadcasters and the military, exhibited sales declines.  In the case of broadcasting, the continuing advertising recession makes it unlikely that sales in this area will improve in the coming year.  Subsequent to the terrorist attacks of September 11th, we have seen increased levels of orders for our military products but we do not know how long lasting this will be.  Consequently we are continuing to monitor spending very carefully. Excluding reserve increases and write-offs, which are not expected to reoccur this year, Data Systems returned to operating profitability in the fourth quarter of 2001.  If sales reach our current plan level, this subsidiary should make an operating profit for 2002.

Licensing revenue, as predicted last year, was satisfactory at approximately $12 million.  Underlying this result were two major factors, one of which was negative, the other positive.  Historically, most of our licensing income has been from analog video recorders, and sales of these devices are in rapid decline.  Offsetting this, in the fourth quarter we received $3.5 million representing the first ongoing license for Ampex technology in the MiniDV digital camcorder product. This agreement is significant because it supports the position we have taken for quite some time, with various manufacturers, that our digital technology is used in MiniDV.  The fourth quarter receipt represents payment for use in prior periods and we expect that continuing payments from this licensee will contribute moderately to royalty revenue in 2002 and beyond.  Our negotiations with other manufacturers of similar products continue and we are now more optimistic that we will eventually sign additional licenses which would increase digital royalty income.  However, our experience has been that licensing negotiations are very time consuming and in the short run we expect that analog royalties will decline faster than digital royalties increase.  With the caveat that licensing income is hard to forecast, our best estimate is that in the first half, overall royalties will be lower than they were last year.  If we are successful in some of our current negotiations, royalties could improve in the second half of 2002.

In order to generate current income, licensing efforts are heavily directed towards digital camcorders, but we have parallel programs to license our technology for numerous other products, including digital still cameras and DVD recorders. The patents in question derive from high-end professional video products that Ampex introduced 7-10 years ago, which has been the typical elapsed time before such technology finds its way into the consumer market. Potential licensing opportunities from these sources could be very significant, but it is not possible at this point to gauge the likelihood of success. If any agreements are concluded we will, of course, report them in future quarterly reports.

The withdrawal from sale of Data Systems and the cash losses of iNEXTV severely strained Ampex's liquidity in 2001. During the first quarter of the current year, we accomplished a refinancing of almost all of our indebtedness that provides significant near-term relief from debt service issues.  However, debt levels remain high and the related interest expense will increase the difficulty of returning to overall profitability.  In these circumstances we are working to optimize the returns from our existing businesses, Data Systems and the licensing program. This has to remain our priority until debt has been reduced to a more manageable level, at which time we can increase our focus on growth strategies.

While Ampex has avoided the fate of many of our Internet competitors we are still in the process of rebuilding in the aftermath of a terrible year. The people who work at the Company have done an outstanding job in very difficult circumstances.  We are fortunate to have their continuing dedication.

This letter summarizes some of the information that is contained in the annual report on form 10-K that is attached. I encourage you to read the full report for a better understanding of the risks and opportunities that we face in 2002.

Yours sincerely,

Edward J. Bramson

Chairman