Chairman's Annual Report Letter - 2004

Dear Ampex Shareholder,

For the year ended December 31, 2004, Ampex reported a net profit applicable to common stockholders of $46.4 million or $12.17 per diluted share. On the same basis in 2003, we reported $20.8 million of net income; however this included a one-time non-cash gain of $24.0 million from the redemption of preferred stock. The increase in profits in 2004 results from a very successful year in our patent licensing business segment, which generated gross licensing income of $72.9 million.

Our many years of research and development in video technology have resulted in many technical awards, including 11 technical Emmys and an Oscar. Ampex has also been granted numerous patents that we have been licensing for use in consumer products since 1968 that have generated hundreds of millions of dollars in royalties.

Ampex pioneered many aspects of digital imaging technology and in the 1990's introduced a family of products that were the first to overcome the technical problems of producing professional quality video using digital image compression. These products, which we sold under the DCT trademark, are still in use producing images of a quality that has not been surpassed for today's television standard. Digital compression technology has since become the basis for many new categories of consumer products including digital still cameras, DVD recorders, camera-equipped cellular telephones, digital television receivers, and many others. As a result of similar basic technology migrating to multiple markets, we decided several years ago to expand our patent licensing program outside of the videotape recorder market which has unintentionally been the major part of our royalty income. In last year's letter to you I referred to our efforts to broaden the base of products and patents that we license and I am pleased to report our first major successes in this regard.

In 2004, in addition to a strong performance in digital video camcorders which continued from the prior year we generated our first royalties from digital still cameras, totaling approximately $65 million. Last year, we also licensed our first manufacturer of DVD recorders, which has generated a relatively small amount of revenue so far but is a very encouraging sign for the future. Having now expanded the number of markets in which we license our patents from one in 2003 to three in 2004, we are looking to add more licensees in these categories and also to add additional products such as camera-equipped cellular telephones, television cable box recorders and others.

The emergence of digital image compression as one of the key mainstream consumer technologies is a major development for Ampex, as it greatly increases the size of the markets that our licensing program can address. The nature of our patents, the markets for them and the future prospects for our patent licensing revenue are subjects that are more complex than can be dealt with in this letter, so I encourage you to read our report on Form 10-K, which is attached, to obtain a better understanding of these topics.

In 2004 some of our new license agreements generated large lump-sum payments that provide for an element of prepaid royalties through the first quarter of 2006. However valuable this was in allowing us to reduce debt rapidly, we believe that this is not the best approach for Ampex to take in the future, as we are attempting to build a longer-term base of recurring royalties. Accordingly, while we are confident that we will negotiate additional licenses in 2005, we expect that many of them will be constructed to provide us with recurring royalties rather than large one-time payments over the lives of the patents.

Ampex Data Systems, our subsidiary that manufactures advanced image acquisition and storage systems, earned operating income of approximately $1.5 million in 2004, significantly less than the $6.5 that was earned in 2003. This reflects some large one-time costs that are discussed in our report on form 10-K and also includes the effect of an increase in Research, Development and Engineering expenditures to 13.8% of sales in support of new product introductions. As I mentioned in last year's letter, the company has an exciting opportunity to fill a new market need for semiconductor and hard disk-based data and image acquisition devices. These products would be used by our traditional customers in the intelligence gathering and aerospace markets, where Ampex is very well established and would replace a large installed base of older technology equipment that Ampex supplied for the previous generation of requirements.

2005 should be a year in which Data Systems continues to deliver early evaluation units to several customers. Based on this. we expect to receive larger follow-on orders during the year. If this proves to be the case the Company could experience an important profit growth cycle in beginning 2006 and extending well into the future.

Our cash flow in 2004 was excellent and enabled us to repay $63.9 million of high interest debt.  The cost of this debt during the year was approximately $9.7 million or $2.56 per diluted share. We expect to repay the remaining balance of our 12% long term debt during 2005 so our earnings will benefit significantly from lower interest expense in future periods. Our cash flow will also be enhanced by the ability to shelter our future earnings from income taxes, since we will be able to utilize our net operating loss carry forwards.

In last year's letter I pointed out that we might be forced to litigate to enforce our patents which, unfortunately has proved to be the case. Our overall strategy is to conclude license agreements on commercially reasonable terms wherever possible. However, particularly as we seek to expand the number of markets in which we license our patents, additional litigation with its attendant costs and risks is something that we should continue to be prepared for.

The profits that we are generating today are the result of many years of work and of farsighted investments in technology that were made in prior years. For example, the technology in our DCT products that were introduced in the 1990s is likely to be the foundation for our licensing revenue in the next several years. The strong positive change in Ampex's situation and prospects that has occurred in the last year could not have happened without the experience and persistent dedication of the team of highly capable people that we are fortunate to have working at Ampex.  I am sure you will join me in expressing our sincere thanks to them.

I encourage you again to read the attached report on Form 10-K for a more detailed understanding of the events affecting Ampex in 2004 and of the prospects that we see in 2005.

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 l995 (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 or adverse legal determinations finding the Company.s patents not to be valid or not to have been infringed; 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 contributions to the Company.s pension plans which are substantially underfunded; 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 in the Company's 2004 Annual Report on Form 10-K filed with the SEC and its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004, and September 30, 2004 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.