Chairman's Annual Report Letter - 2002

Dear Ampex Shareholder:

In the year ended December 31, 2002 Ampex reported net income applicable to common stockholders of approximately $1.4 million, compared with a net loss of $22.4 million for the previous year. The improvement reflects, in part, non-recurring items, including a major reduction in charges and losses related to discontinued operations, which accounted for the majority of the 2001 loss and the reversal of an income tax provision in 2002 that is no longer required. Our major financial objective is, as it was last year, to rebuild our liquidity and to reduce our long-term debt to place the company in a position to return to a growth strategy.

On an operating basis, our manufacturing subsidiary Ampex Data Systems improved from a loss of $5.4 million in 2001 to income of $4.3 million in 2002. Demand for Data Systems products was similar to the prior year as slight sales declines were offset by an increase in the backlog of unshipped orders. Sales of large digital video archive systems to the broadcasting industry were at very low levels in 2002, reflecting industry-wide capital spending conditions. On the other hand, sales of products to the government, principally for intelligence gathering applications, increased slightly.

As you will recall from previous reports, our government related business has been affected for several years by continual cutbacks in defense spending.  Based on this trend, we have been reluctant to invest additional resources in this market segment. However, we are now seeing that our customers have plans to upgrade their intelligence collection capabilities and we have begun some engineering efforts to address these opportunities. For the most part, this will involve adding products to our existing line that broaden the range of storage technologies we offer. Based on recent experience, we are cautious about extrapolating recent defense expenditure levels too far into the future but we are comfortable that the planned research and development spending in this area is a reasonable risk.

The lower fixed cost structure at Ampex Data Systems now permits us to be profitable at much lower sales levels than in the past. Based on orders that can reasonably be foreseen at the time of writing, we expect enough sales to result in a satisfactory year for Data Systems in 2003.

Royalty income in 2002 declined dramatically from 2001. Revenues from analog-based patents that have generated the bulk of licensing income in the recent past have declined as the products have been superseded and, in some cases, the relevant patents have expired. Looking back over the 10 years prior to 2002, royalties have been quite volatile ranging from $2.6 million to $19.9 million. 2002, at $3.7 million, was at the low end of the range, but we are optimistic that 2003 will bring higher royalty income and we have active and continuous licensing efforts in progress.

The patents that we are endeavoring to license cover products in many digital consumer electronics categories such as digital VCRs, recordable DVDs and digital still cameras, each of which represents a large market opportunity. We began the current round of licensing efforts in 2001 and have provided written notice of our belief of infringement of our patents to 17 companies so far. As might be expected, potential licensees are resisting paying us on the grounds that our patents are invalid or do not apply to their specific designs. We are making good faith efforts to resolve these disagreements but with so many patents, products and companies to deal with this is a major undertaking. We hope to avoid litigation, but if the alternative is an indefinite delay, we may have to fund the cost of significant lawsuits to enforce our patents.

I would like to draw your attention to a topic that is not directly related to Ampex's operations, the Company's non-compliance with the listing requirements of the American Stock Exchange. At present, our shares are listed based on a temporary waiver from the Exchange. Our current expectation is that the waiver will not be extended and that, perhaps by the time you receive this letter, our shares will be delisted. If that occurs, the Company's shares should continue to be eligible for quotation by market makers on the NASDAQ OTC Bulletin Board System. The NASDAQ is requesting the Securities and Exchange Commission to approve a new stock exchange, the BBX, for companies that do not qualify for the National Market System. It appears likely that Ampex would qualify for listing on the BBX and we expect to apply as and when the new exchange begins trading.

We are also proposing, as discussed in detail in the proxy statement accompanying this letter, to reduce the outstanding number of Ampex shares by effecting a reverse stock split as many companies have recently done. At the current price per share the percentage of value that is charged when buying or selling Ampex stock is extremely high. An increase in the price per unit of the Company's stock would make trading more economically feasible and we are recommending that you vote in favor of this change.

For the economy in general and for most companies in Silicon Valley, 2002 was a difficult year. Ampex's people have done an excellent job of managing the factors that are within their control and we are fortunate to have their continuing commitment. 

Attached to this letter is a detailed report on Form 10-K that deals in depth with the issues touched on in this letter and many other important topics. I encourage you to read the full report for a better understanding of Ampex's current performance and the outlook for the coming year.

Yours sincerely,

Edward J. Bramson

Chairman