Chairman's Annual Report Letter - 2003

Dear Ampex Shareholder:

For the year ended December 31, 2003, Ampex reported net income applicable to common stockholders of $18.2 million compared to $1.4 million in 2002. The results for 2003 include a non-recurring gain of $24.0 million from the redemption of Preferred Stock.

Operating income increased to $0.6 million from a loss of $0.2 million in 2002. I believe it is fair to say that the underlying improvement in operating profit was substantially better than these figures suggest for two reasons. First, we established a provision of $5.4 million to cover the possibility that we may not be reimbursed by a former subsidiary for the full amount of pension contributions that we will be making over the next six years. Second, we recorded a provision of $3.1 million for the future costs of real estate in California that is unoccupied and for which we are seeking a tenant.Aside from these unusual factors, the operating performance in 2003 was actually quite strong.

Ampex Data Systems, our subsidiary which supplies advanced image storage and archiving systems, enjoyed a good year, earning operating income of $6.5 million, an increase of 52.9% over the prior year. As a result of improved margins, profits of Data Systems improved on revenues that were essentially unchanged, even after absorbing an increase in Research, Development and Engineering expenses to 9.5% of revenue. Last year I mentioned that we have been developing some exciting new high-speed data acquisition and storage equipment based on solid-state memory and disk technology to supplement our traditional tapebased products. I am pleased to say that we have now received initial orders for this new family of products.  Early indications are that the price/performance ratio coupled with Ampex's excellent reputation and customer relationships in the defense and intelligence customer base could enable Data Systems to become the market leader in a new and growing market segment.

The greatest contributor to Ampex's 17.2% increase in overall revenues and to the improved operating profits in 2003 was income from our licensing portfolio of digital imaging patents. As I forecasted in last year's letter, royalty income improved significantly, rising to $10.1 million from $4.0 million in the previous year. Some of the increase resulted from payments by licensees that were actually due to us in earlier periods, but ongoing royalties are now running at a rate significantly greater than in 2002. Encouragingly, substantially all of our royalties now come from digital video recorders and camcorders rather than from analog products that are now largely obsolete.

As discussed in previous annual reports, licensing income has tended to be volatile and difficult to forecast. In 2003 our royalty income was solely generated by digital videotape recorders and camcorders. Starting two years ago we have been moving aggressively to broaden the base of royalties to include additional areas of consumer electronics where we believe our patented technology is being used. These markets include DVD recorders and players, digital still cameras and digital television receivers, each of which represents large future market opportunities.

I am pleased to report that, after the year end, we negotiated our first license for DVD recorders, which we expect to sign shortly. This new licensee, a multi-billion dollar manufacturer of consumer electronic products based in Japan, has informed us that they expect to begin production later this year of certain new products that will use our patents. Since these products have not yet been marketed, it is not possible to forecast the revenue impact on Ampex this year, but is an indication that developments in the DVD market may be moving favorably for us.

At the end of 2002, we had notified 17 manufacturers of digital still cameras of their potential infringement of our patents and, as of today, we believe we have put substantially all major manufacturers on notice.We are currently in advanced negotiations for our first patent license in the digital still camera field with one of the largest manufacturers in this market, but we are at present far apart on financial terms. While we hope to arrive at a satisfactory agreement it is reasonably likely that, as I mentioned in last year's letter, litigation will become necessary. We will, of course, announce developments in this situation as they occur.

There are several negotiations under way with other potential licensees, not just digital still cameras but also other products that we believe to be infringing our patents. It is too early to say what impact, if any, these negotiations will have in 2004. However, Ampex has been in the licensing business for more than 30 years and our patent portfolio is the result of substantial and forward-looking investments in research and development of digital imaging technology over many years. An expanded licensing program has the potential to produce a dramatic change in Ampex's financial outlook and our strategy is to pursue these opportunities aggressively.

As we have said in previous letters, our preference is to avoid the substantial expenses that patent lawsuits involve. However, if we do have to litigate, our recent financial performance has substantially improved our ability to do so. The management team has done an excellent job of cash generation and our liquid resources should be more than adequate for any litigation costs that can currently be foreseen.

An additional boost to our liquidity occurred after the year end, in March 2004, when we successfully amended our borrowing agreements. These have now extended to December 31, 2006, the date by which we are required to make $30 million of repayments. The successful negotiation of these amendments is a credit to the constructive relationships that Ampex's finance team has developed with our lenders over many years.

The year 2003 was a year of significant improvements. In part, this is attributable to a better business environment, but also is the direct result of the management team that has responded remarkably to the challenges the company faced as we entered the year. These men and women consistently do an exceptional job of managing the factors that are within their control. We are fortunate to have their continuing commitment and enthusiasm.

Attached to this letter is a detailed report 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 Bramson

This letter contains predictions, projections and other statements about the future that are intended to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (collectively, "forward-looking statements"). Forward-looking statements relate to various aspects of the Company's operations and strategies, including but not limited to the effects of having experienced significant losses in the past and the risk that the Company may incur losses in the future; the Company's limited liquidity and significant interest expense; its sales and royalty forecasts for future periods not being attained and the risk that the Company will not conclude additional royalty-bearing license agreements covering its digital technologies; the Company's marketing, product development, acquisition, investment, licensing and other strategies not being successful; possible future issuances of debt or equity securities; the possible incurrence of significant patent litigation expenses; new business development and industry trends; the possible need to raise additional capital in order to meet the Company's obligations; reliance on a former affiliate to make pension contributions; and most other statements that are not historical in nature. Important factors that could cause actual results to differ materially from those described in the forward-looking statements are described in cautionary statements included in this letter and/or inthe Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2003, June 30, 2003 and September 30, 2003 and its 2003 Annual Report on Form 10-K filed with the SEC.In assessing forward-looking statements, readers are urged to consider carefully these cautionary statements. Forward-looking statements speak only as of the date of this letter, and the Company disclaims any obligations to update such statements.