Chairman's Annual Report Letter - 1998

Dear Ampex Shareholder,

I am pleased to report that Ampex earned a net profit of $10.4 million for l998, marking five consecutive years of profitability. Cash and short-term investments at the end of the year comfortably exceeded $60,000,000.

In last year's letter to you I predicted that 1998 would not be an easy year in which to make money and, in fact, earnings per share of $0.20 represented a decline from the $0.32 that we reported in 1997. A major contribution to this result was the reduction in mass data storage revenues that we had anticipated and the initial costs of repositioning Ampex into faster growing markets.

With a view to accelerating the repositioning process, we have recently made several strategic acquisitions and investments. In support of these efforts we raised $44 million of new funds for investment in 1998 and we also restructured our Preferred Stock to provide for more financial flexibility. These moves were essential groundwork for growth, but together they reduced 1998 earnings by approximately $.09 per share. Our acquisition of MicroNet Technology, Inc. which makes high performance disk arrays that complement our mass data storage products, also required us to absorb acquisition costs and operating losses amounting to a further $.06 per share for the year.

There were many other factors that affected 1998 earnings and a detailed discussion of this important information, our markets, financial performance and other matters is contained elsewhere in this report, as well as in our 10-K which has been filed with the SEC. I urge you to read them to obtain a fuller understanding of our activities in 1998.

As you know, Ampex has for some years been a quality and technology leader, but in markets that have not been expanding. As a result, we are redeploying resources into Internet video projects. This is an image-based market, related to our core expertise, that is experiencing  high rates of growth. I shall devote a significant part of this letter to discussing  our strategies in this field and our actions to date.

An important organizational step was the planned transition to a holding-company structure that we completed early in l999. This means that substantially all of our traditional mass data storage business now resides in a wholly owned subsidiary, Ampex Data Systems Corporation. MicroNet is also operating as a separate wholly owned subsidiary, and our investments, acquisitions and new internal business units will be owned and operated as separate units each reporting to the parent
company, Ampex Corporation.

We believe that this new structure will promote accountability and measurability; that it will expand financing options; and that it will enable us to attract, manage and reward people in ways that are more tailored to the needs of the specific unit. Accordingly, future references to Ampex mean the parent company and not simply the mass data storage business.

The revenue shortfalls at Ampex Data Systems result primarily from the fact that we have been completing shipments under existing government programs while experiencing deferrals in new government orders. Our competitive position remains good, but government spending programs are generally cyclical and the funding restraints that are being applied to them are obviously beyond our control. We have recently announced two major programs with government customers and we see the prospect of several others. However, while we do expect to refill the order pipeline, we do
not expect to see much improvement, if any, in shipments to government customers this year.

A major opportunity for Ampex Data Systems in 1999 is in digital image archives. Some broadcasters and cable networks have begun to re-equip for digital operations and we have won a meaningful share of their business. The recently concluded joint marketing agreement with
Tektronix, Inc., a well-established company in the broadcast server market, should generate additional sales of DST libraries. However, despite the publicity about digital television, the actual pace of investment to date has been slow. We are cautiously optimistic that 1999 will begin a significant broadcast re-equipment cycle, but again, while we are well positioned we are not really able to influence the timing of this market opportunity.

We are continuing to streamline Ampex Data Systems and will be relocating a majority of its operations to our facility in Colorado. This will provide significantly lower costs by the end of 1999, but will result in substantial costs during the year. It is not realistic to expect significant profit improvement at Ampex Data Systems until the relocation is complete and revenues begin to increase.

MicroNet, the disk array manufacturer that we acquired in June, has been undergoing a major makeover in its product line, a headquarters relocation and a complete reorganization of manufacturing. MicroNet is a well-known factor in the markets for digital images, especially
digital pre-press and digital video editing and we believe that the infusion of investment by Ampex is now returning the company to a leadership position in its industry. Its new Genesis products have
received very favorable press attention, and new product revenues have been growing in the last few months. MicroNet operated below break-even in 1998 and is expected to do so in 1999. However, our plan is for MicroNet to be profitable late in the year and, of course, its revenues help to increase the overall sales level of the Company.

In the medium term, since Ampex Data Systems and MicroNet operate in similar markets, it is our objective to capitalize on the synergy between them, especially in marketing. Ampex Data Systems and MicroNet are planning several new product introductions and we are continuing to invest in their growth. Both companies have strong management in place, headed by K. Michael Cooper, who joined Ampex last June. I am confident that they will accomplish the goals that they have set. For the time being these two subsidiaries are expected to represent substantially all of our involvement in manufacturing industries.

Turning to our strategy for Internet video-based business expansion, I would like to restate the point that Ampex is an electronic imaging company. We have learned how to take electronic images and audio, process, manipulate, compress and store them, and to make them look and sound better. I wrote last year of our belief that the Internet has the potential to become the key video delivery medium, eventually eclipsing television, DVD or VCRs, but that the timing of this occurrence is uncertain. Since my letter of last year there has been a key market development that makes the time for Internet video, if not now, then very soon indeed.

This development is the dramatic growth in streaming video software. Ampex and other video companies have used streaming in video applications for many years. The technique has now been adapted for the Internet, which began its life as a text-based network. The addition of a graphical layer to the Internet created the world wide web and gave the technology much wider appeal. The arrival of streaming video could well be the next advance that dramatically broadens Internet usage. The required software is available from various suppliers and the versions offered by two companies in particular, Real Networks and Microsoft, are available to millions of PC users now, and more downloads are occurring everyday.

Many individuals and companies believe that the key to success in Internet video is the availability of high speed (broadband) Internet access because, until then, the network cannot deliver acceptable video. We think that streaming software is the real revolution because it delivers video today whereas broadband delivery is primarily an evolution that will make the video look better over time.

Internet video is not television; the images are not that good. We believe that Internet video will evolve as a distinct medium, incorporating elements of television, the telephone and the printed
word, but different from all of them. This medium will require specialized production values and techniques to maximize its impact. We believe that in this environment, video will be only a part of an experience that includes text, audio and the interactivity of the Internet, but makes them more compelling and effective.

Proper targeting of Internet video markets will be important, as will economies of scale in certain areas. Our strategy is to target relatively small groups of highly interested consumers, to assemble a
large number of such groups and to reach them through web narrowcasting. In this way we can justify an organization to produce, brand and market our collective content on a major scale. Finally, and importantly, we foresee an opportunity to use Ampex Data Systems' and MicroNet's image storage expertise to archive all of our material, thereby building a content library that will have long-term value, much as television, film and information libraries do today.

The period of time to establish an early lead in this area may be short, so we accelerated our start-up plans with three strategic investments between September 1998 and February of this year. The first, Reiter Associates, Inc. is a small, highly talented organization that provides various services including e-commerce support to businesses operating on the world wide web. Our strategic interest in Reiter stems from the possibility that e-commerce will be the most important source of profit on the Internet, and that it could be useful to have in-house expertise in this field. Our initial investment represented 20% of Reiter's stock with an option to acquire a majority. We will be exercising this option after the end of the first quarter and Reiter will become a majority-owned subsidiary of Ampex at that point.

Our second and third strategic investments are targeted more directly at delivering video over the Internet. TV on the WEB, Inc., in which we invested in January 1999, provides special interest web video "channels" for sponsors that are primarily business-to-business oriented. It is a full service operation that can provide services ranging from production and web distribution to live webcasts and advertising sales.

Alternative Entertainment Network, Inc., in which we invested in February 1999, is among the more successful on-demand streaming video web sites. It produces and aggregates content that is generally entertainment oriented and consumer focused. AENTV.com was recently listed by the influential magazine, Broadcasting & Cable, as one of the "10 Great" streaming video web sites in the country. In both of these cases we have acquired a 20% interest with the option to acquire a
majority so that they may become, as with Reiter, majority-owned subsidiaries of Ampex in the future.

In addition to these strategic investments and acquisitions, we have begun construction of our own Internet video production and distribution center in the Los Angeles area to be followed closely by a similar operation in New York City. These facilities will give Ampex a base for its own set of "channels" yet to be named. These new channels will be complementary to those of AENTV and TV on the WEB which will develop as independent brands. We have recently hired experienced professionals, based in New York, to head the marketing, programming and advertising sales functions for our own channels and to coordinate with AENTV, TV on the WEB and other potential affiliates.

While the Internet is an ideal vehicle for delivering content to the whole nation or across the globe, the availability of content tends to be concentrated regionally; for example, entertainment in Los Angeles or fashion in New York. Accordingly, the efficient gathering of Internet video content requires us to be in the places where the interesting content is. With operations or affiliates in the New York, Los Angeles and Washington, D.C. areas, Ampex is already present in three of the world's key media and content centers and we will be adding more of them in this country and overseas.

Unfortunately, a letter such as this does not lend itself to a detailed discussion of such a complex topic, but we will be making announcements as our plans unfold. We are thinking of additional ways to communicate with you possibly including the use of the world wide web, and I also intend to update you personally on our status later in the year.

Earlier in this letter I pointed out that various measures are necessary to ensure the profitability of our manufacturing subsidiaries. Additionally, while we currently have the financial resources to pursue
the Internet video market, the costs of so doing will be high for some considerable period. Accordingly, I want to make you aware that while we may be profitable in one or more quarters of 1999, I expect that in several quarters and for the year as a whole we will probably report a
loss. Obviously we are looking for ways to make all of our ventures profitable as soon as possible, but it is too early for me to indicate to you realistically whether, or how soon, this might occur.

Those of you who are familiar with Ampex or have been shareholders for a while have a good view of our challenges and of the opportunities created by our unequaled experience in electronic imaging. At first glance, Internet video might seem to be a major departure for Ampex, but
in fact, our knowledge base is what gives us insight into this opportunity and the resources to be successful. A growth strategy is inevitably more unpredictable and loss-prone than business as usual, but we believe that the potential rewards justify the risks we are taking.

Attracting to Ampex the people that bring the new media and other skills that we need, and retaining the commitment of those who are already here, is the key to everything we will ever achieve. It is a privilege for me to be associated with the fine people at Ampex, MicroNet and our new Internet video affiliates.

For our employees and our shareholders, l999 promises to be an exciting year.

Yours sincerely,

Edward J. Bramson

Chairman

This Annual Report 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: its sales forecasts for future periods; the development of application software for its 19-millimeter products; the Company's marketing, product development, acquisition, investment, licensing and other strategies; the effect of increased inventories; redemption of the Company's outstanding Preferred Stock; possible future issuances of debt or equity securities; the Company's liquidity and anticipated interest expenses; the Company's Internet strategies and initiatives; new business development and industry trends. 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 Annual Report and/or in the Company's Form 10-K for fiscal 1998, filed with the Securities and Exchange Commission. 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 Annual Report, and the Company disclaims any obligation to update such statements.