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Article by DailyStocks_admin    (03-19-08 03:30 AM)

Filed with the SEC from Mar 06 to Mar 12:

Ampex (AMPX) ValueVest Management, Ampex's largest shareholder, wants to nominate two candidates for election as directors at the 2008 annual meeting. ValueVest said that if the slate of directors nominated by the board doesn't include its nominees, Mark B. Bakar and David Cariani, it will reserve its right to solicit proxies in opposition to the board's slate. ValueVest holds 524,336 shares (13.4%).

BUSINESS OVERVIEW

Introduction

Ampex Corporation (“Ampex” or the “Company”) is a leading innovator and licensor of visual information technology. During our 62-year history, we have developed substantial proprietary technology relating to the electronic storage, processing and retrieval of data, particularly images. We currently hold approximately 450 patents and patent applications covering digital image processing, digital image compression and recording technologies. We leverage our investment in technology through our corporate licensing division that licenses our patents to manufacturers of consumer electronics products. Through our wholly-owned subsidiary, Ampex Data Systems Corporation (“Data Systems”), we also incorporate this technology in the design and manufacture of very high performance data storage products, principally used in defense applications to gather digital images and other data from aircraft, satellites and submarines. These products are also used in flight and sensor test applications.

We have two business segments, which we refer to as our Recorders segment and our Licensing segment. Our Recorders segment primarily includes the sale and service of data acquisition and instrumentation recorders (which record data and images rather than computer information), and to a lesser extent mass data storage products. All of our products are made by our manufacturing subsidiary, Data Systems. Our Licensing segment involves the licensing of our intellectual property to manufacturers of consumer digital video products through our corporate licensing division. Our products and licensing activities are described below under “Licensing Segment,” “Recorders Segment” and “Patents, Licenses and Trademarks.” For information regarding revenues, income or loss, assets and other financial data for each business segment for each of our last three fiscal years, see Note 18 of the Notes to Consolidated Financial Statements and “Business Segments” under Item 7 below. For financial information relating to our operations in various geographic areas, see Note 19 of the Notes to Consolidated Financial Statements.

We incorporated in Delaware in January 1992 as the successor to a business originally organized in 1944. References to “Ampex” include subsidiaries and predecessors of Ampex Corporation, unless the context indicates otherwise. Our principal executive offices are located at 1228 Douglas Avenue, Redwood City, California 94063, and our telephone number is (650) 367-2011. Our Class A Common Stock is quoted on the Nasdaq Capital Market under the symbol “AMPX.” We also maintain a website on the Internet at www.ampex.com .

Our trademarks used in this report include “Ampex”, “DCT”, “DST”, “DCRsi”, “DIS”, “DDRs” and “DSRs”, which are trademarks of Ampex Corporation. All other trademarks and service marks used in this report are the property of Ampex or their respective owners.

Overview

Ampex has a significant portfolio of patents that results from investments in research, development and engineering that we have made to design and improve the products made by our manufacturing subsidiary, Data Systems. In general, our products have been designed for demanding and specialized professional television or intelligence gathering use and have, therefore, been too expensive for sale to individual consumers. However, we have found that, in many instances, patented innovations in performance or features developed for the professional markets have later been adopted in consumer products, typically 7-10 years later.

In order to generate revenues from the consumer markets that we do not sell in directly, we license our patents to manufacturers of consumer electronics in return for royalties based on the value of their sales. In 1968, we licensed our first manufacturer of consumer videocassette recorders (“VCRs”) and subsequently we licensed essentially every significant manufacturer of VCRs in the world. As our earlier patents expired, we developed new patented inventions and licensees continued to pay royalties to be able to incorporate these new patents in their VCRs. In the period 1990 to 2000, our licensing income fluctuated significantly but averaged $16 million per year. VCRs were based on analog video technology. We ceased to develop analog technology many years ago. Most of the relevant patents expired by 2001 and our licensees no longer pay significant royalties on analog products. However, Ampex’s research and development in the field of digital video recording resulted in patents which have found application in digital camcorders, digital still cameras and we believe other products that record still or motion video images. Today, substantially all of our licensing revenue comes from manufacturers of digital camcorders that have licensed several patents that do not expire until after 2012. We continue to investigate use of our digital video patents in other consumer products and are in active negotiations with several of our licensees and other manufacturers of digital still cameras and camera-equipped cellular phones but we are not presently receiving licensing revenues on these products. In 2007, we intend to explore additional ways, including possible arrangements with independent patent research and evaluation companies and other third parties, to monetize our intellectual property. There can be no assurance that these expanded efforts will be successful.

Technology

In the 1980’s Ampex was a leader in the development of digital video technology for use in such products as digital special effects, digital graphics, digital time base correctors and many others. We received limited royalty income from licensing these patents for use in broadcast television products, but the markets were small and image-based consumer products did not employ digital technology at that time for various reasons, including cost.

As part of our digital video technology development, Ampex made developments in digital image compression, and in the mid 1990’s we introduced the first professional videotape recorder to successfully use digital image compression. These devices were part of a family of products marketed by Ampex under the DCT trademark. The patents that we received as a result of designing these products are now, we believe, among the most potentially valuable to our licensing program with the manufacturers of digital video imaging consumer products.

Digital image compression, which was developed by Ampex and by several other companies, has been a key factor making it possible to produce new generations of digital consumer imaging products at affordable prices. Products that store images without compression have remained too inefficient and expensive. Compression lowers component costs and also reduces size, power consumption and data storage requirements, which are crucial to making devices that are portable.

The adoption of digital technology in consumer markets also resulted in a technical convergence among consumer products. For example, in the analog era, still video images were captured on chemical film while motion video was captured on magnetic videotape. Today’s digital products use common technologies so that digital still cameras can record motion video as well as still video images, digital video recorders can record still video images as well as motion video, and some digital cellular telephones can record and transmit both types of video images. This convergence has been important to Ampex because it has enabled us to broaden the markets that our licensing program can address. During the period that we licensed analog technology, substantially all of our royalties came from VCRs. Most of our analog VCR patents expired in 2001 and we no longer receive significant licensing revenues on these patents. In 2003 most of our royalties were from digital video camcorders. In 2004, 2005 and 2006, we continued to generate significant royalties from digital video camcorders but the majority of our licensing revenues came from digital still cameras, and we also generated royalties from DVD recorders. In April 2006, our Rapid Image Retrieval patent (“121” patent) used in digital still cameras and camera-equipped cellular phones expired. While we continue to believe that certain other patents are being used in digital still cameras and camera-equipped cellular phones which do not expire until after 2012, all of these licensees have discontinued royalty payments to us subsequent to the expiration of the 121 patent.

Patents

Our Rapid Image Retrieval patent had been responsible for the majority of the license income that we earned in the first half of 2006, and in years 2005 and 2004, principally from manufacturers of digital still cameras and, to a lesser extent, manufacturers of camera- equipped cellular phones. The patent expired on April 11, 2006. We own additional patents that relate to digital imaging, which we believe are generally relevant to many digital consumer imaging products, and we are currently receiving royalties on these patents from several manufacturers of digital camcorders and one manufacturer of DVD recorders. It is our policy to license a portfolio of our patents in order to provide our licensees with the maximum amount of design freedom. Whether our licensees use one or several of our patents, the royalty rate is unaffected. We do not receive information from our licensees as to which specific patents they actually use at any point in time. Certain of our digital imaging patents are discussed below.

Image data shuffling patents are used to reduce the amount of data required to transmit or record an image. These patents expire at various dates through 2013 and have been issued in the USA, France, Great Britain, Germany and Taiwan. We believe that these patents are necessary for the production of digital video camcorders because they are included in applicable technical standards. We believe it is possible that they also may be used in DVD recorders and set top cable boxes that are equipped to record video (“cable boxes”). The technology is useful in compressing either still or motion video images and we believe it is possible these patents may be used or useful in digital still cameras and possibly in camera-equipped cellular telephones.

Feed forward quantization patents are also useful in reducing the amount of data required to transmit or record images, principally video images. These patents expire at various dates through 2012 and have been issued in the USA, France, Great Britain, Germany and Taiwan. We believe that these patents are used in the production of digital video camcorders complying with applicable technical standards. We believe that these patents may be used in DVD recorders and cable boxes. We also believe that they may be used or useful now or in the future in digital still cameras and camera-equipped cellular telephones that have the capability to record still and motion video.

High-speed data decoding patents may be useful in any digital device that displays video. The patents expire at various dates through 2014 and are issued in the USA, Austria, France, Great Britain and Germany, and an application is pending in Japan. We are investigating the extent to which these patents may be used in many consumer digital devices but we have not yet reached a conclusion as to which products, if any, may currently infringe these patents.

Markets and Customers

The major product categories from which we receive royalty income at present are:

Digital video camcorders . In 2006 and 2005, we received recurring royalties from manufacturers of these products totaling approximately $7.7 million and $5.1 million, respectively. Additionally, under an agreement concluded in July 2005, Samsung Electronics, Co., Ltd. prepaid $2.75 million to us for the right to use our patents in digital video camcorders, through 2008. Commencing in the third quarter of 2006, Sony Corporation (“Sony”) started paying recurring royalties based on the value of its sales in countries where our patents are in force and infringed by their products. Accordingly, we expect that our recurring royalties from digital video camcorders should increase from current levels, assuming sales levels remain the same.

Digital still cameras. In 2006 and 2005, we received approximately $2.1 million and $20.4 million, respectively, of royalties for use of our patents in digital still cameras. Of this amount in 2005, approximately $15.9 million represents negotiated settlements covering past use of Ampex’s patents and, in some cases, a prepayment of royalty obligations through April 11, 2006. April 11, 2006 coincides with the U.S. expiration of our rapid image retrieval patent (“121”), which is used in digital still cameras and in certain camera-equipped cellular phones. While our digital still camera license agreements permit our licensees to use our portfolio of digital imaging patents, by agreement, we received royalties only on the ‘121’ patent through its expiration date. We have analyzed several digital still cameras and believe that many utilize our feed forward quantization patent. We have provided claim charts to ten licensees that allege infringement of this patent and we expect to issue additional claim charts to other licensees or manufacturers if further testing indicates that their products infringe our patents. We have conducted numerous technical and business meetings to discuss our claim charts but we have not been able to conclude an acceptable arrangement with some of our licensees to cause them to resume payment of royalties on digital still cameras or camera-equipped cellular phones sold after April 11, 2006. Beginning in the third quarter of 2006, we expanded our research activities with the goal of assessing whether other patents, including image data shuffling and high speed image decoding, are being used in these products. If these expanded research activities successfully demonstrate use of one or more of our patents, current licensees would be obligated to resume payments under the existing terms of our licensee agreements, which we believe are favorable to the manufacturers. We would not expect to be able to assess the effectiveness of these efforts until later in 2007. If these negotiations are not successful we may seek to cancel our license agreements and pursue our other options, including possible litigation.

While we believe that other Ampex patents may be used in various consumer digital imaging products now or in the future, we cannot assure you that this belief is correct.

Camera equipped cellular telephones. Based on current trends, which are for cellular telephones to record higher resolution still images or significant amounts of video, we believe that these products will be required to employ high levels of image compression which may involve the use of our patents. We have notified many major manufacturers of camera-equipped cellular telephones that we believe may be infringing certain of our patents. We cannot assure you that these products infringe our patents now or will do so in the future, or that we will be able to negotiate any licenses for these products. Our discussions are in an early stage and are likely to require substantial exchanges of technical and business information before we can be certain that our patents have been infringed. As a result, we believe it is not likely that we will generate significant income from these products in 2007. If our negotiations are unsuccessful we may have to initiate litigation to enforce our patents at some time in the future.

DVD recorders and cable boxes. In 2004, we were approached by a consumer electronic manufacturer that planned to introduce a line of DVD recorders. We concluded a license with this company that also covers use of our patents in video recorders utilizing hard disks (“PVR’s”) or DVD storage. In 2006 and 2005, less than 9% of our licensing revenue was generated by this licensee and future royalties will be dependent on the value of sales achieved by this licensee. We believe that other manufacturers of DVD recorders and PVRs may be using one or more of our patents. We are currently in discussion with another major manufacturer of DVD recorders concerning a license of our technology. At present we cannot assure you that we will be able to conclude any additional licenses for our DVD recorder and PVR related patents.

We are continuing to review other categories of products such as digital television receivers for potential licensing opportunities but have not yet concluded that any of our patents are being used.

Many of our patents that are relevant to consumer products are the result of design work on professional and broadcast television products. These are markets that we do not presently pursue actively. Therefore, as our patents that are useful in consumer products expire, we may not be able to replace them, with the result that we might cease to receive patent royalties in the future. We will give consideration to funding new research and development projects in the digital imaging field or to the acquisition of patents from others. No decisions in this regard have been taken and there can be no assurance that any new licensable patents will be developed or acquired.

Recorders Segment

Products

All of our products are manufactured by Data Systems and are comprised of very high performance instrumentation products, which represent our principal area of focus, and, to a lesser extent, mass data storage products. High performance instrumentation recorders reproduce data at higher speeds and store larger volumes of data than in general purpose recording devices. Instrumentation recorders capture digital data that is usually generated by a sensor or other devices. Examples include satellite telemetry information and flight test data. Our mass data storage products consist of our 19-millimeter scanning recorders and robotic library systems and related tape and after-market parts. Data Systems also continues to offer spare parts to repair professional video recorders and other products that it previously manufactured and marketed to the television production and post-production industries. However, sales of spare parts of legacy television products accounted for less than 10% of total Recorders segment revenue in all periods reported herein. For information concerning revenue for each product group comprising in excess of 15% of consolidated revenue and other information relating to our operating segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Data Acquisition/Instrumentati on Products. We have been well established for more than 50 years as a supplier of instrumentation recorders. We have supplied these recorders primarily to government agencies for use in airborne and ground based data collection, satellite surveillance and other defense-related applications, as well as to defense contractors and aerospace and other industrial users primarily for test and measurement purposes. Our instrumentation recorders have been used on almost every advanced commercial and U.S. military aircraft, as well as on foreign aircraft. We believe they are well suited to these demanding aeronautical applications and other applications involving comparable data-gathering challenges in extreme environments because of their performance and reliability. Substantially all of our new product development is focused on data acquisition and instrumentation products.

Our principal data acquisition/instrumentati on products currently are the DDRs 400, DSRs 440 and DSRs 400B. These are disk- and solid state memory-based recorders, which are plug-compatible replacements for our tape-based DCRsi instrumentation recorders for ease of data transfer, analysis and archival storage. The removable, hermetically sealed disk cartridge-based DDRs 400 instrumentation disk recorder offers a sustained data rate of 400 megabits per second (“Mb/s”) and storage capacity of up to 960 gigabytes (“GB”). The DDRs 400 is used in airborne image recording, telemetry data and acoustic sonar data acquisition and in flight test and radar development applications. The DSRs 440 and DSRs 400B solid state recording systems include removable, flash memory cartridges and are specifically designed for airborne applications requiring rapid data rates and large storage capacities in a small, rugged and lightweight package. The DSRs 440 offers a sustained data rate of 600 Mb/s and an expandable storage capacity of up to two terabytes (“TB”). The DSRs 400B offers a sustained data rate of 600 Mb/s and storage capacity of up to one TB. The Amux 600 Multiplexer can be internally or externally configured with the DDRs and DSRs product line to enable simultaneous capture of multiple channels of data input in mission critical applications. In 2006, we began shipment of the HRR 700 High Definition Video Recorder. This recorder is a compact, solid state-based recorder that provides up to 224 GB of removable storage and sustained data rates of up to 600 Mb/s. It is fully compatible with our Amux 600 I/O modules as well as other standard industry data input interfaces. As our customers’ data storage requirements increase, solid state memory becomes cost prohibitive. Accordingly, we are designing ruggedized disk-based recorders that offer the economics of disk storage without sacrificing the superior functionality of solid state. Our WDS 2000 FC is a wide band, compact disk array that has been ruggedized for airborne data acquisition and storage and is capable of recording multiple data streams of uncompressed high definition video with RAID 3 reliability in high vibration environments. The WDS 2000 is scheduled for initial delivery in 2007.

The Company continues to offer its tape-based DCRsi 240, DCRsi 120 and DCRsi 75 digital instrumentation recorders. Tapes from these recorders are fully interchangeable. The DCRsi recorders are rugged, highly reliable and compact recorders that permit uninterrupted data capture from fractions of a megabit per second up to 240 megabits per second over very long periods of time, such as during test flights of new aircraft. The DCRsi 240 instrumentation recorder has the capability of storing 48GB of data at a record/reproduce rate of up to 240 Mb/s. The DCRsi 120 instrumentation recorder has a similar storage capacity and a record/reproduce rate of 120 Mb/s. The DCRsi 75 recorder is our lowest cost DCRsi model with a record-reproduce rate of 75 Mb/s. These products are designed for data interchange between locations and agencies. In ground-based applications, which generally are less harsh environments that do not require the ruggedness of a DCRsi recorder, our 19-millimeter DST and DIS mass data storage products can also perform the storage and analysis functions of DCRsi products.

We have shipped our disk- and solid state memory-based products to various U.S. and foreign governmental agencies. Orders for these products have generated backlog of $5.9 million, $9.1 million and $3.7 million at December 31, 2006, 2005 and 2004, respectively. In addition, we have received orders from The Boeing Corporation (“Boeing”) and the U.S. Navy, which are not included in backlog at December 31, 2006. We are to provide Boeing up to $2.9 million of solid state-based data instrumentation recorders with an option for a further $1.1 million subject to Boeing’s authorization. This product is for use in a government defense related program. We have shipped $0.8 million against this order. Shipments for the remainder are scheduled to be made over the next three years but are not included in our backlog since the contract contains provisions whereby Boeing may terminate portions of the order up to 30 days prior to scheduled delivery upon payment of penalties depending on the termination date. We were also approved by the U.S. Navy to provide up to $5.0 million of these newly introduced products, which is not included in backlog. We have shipped $0.4 million against this order. Future deliveries under this approval will be subject to receipt of purchase orders over the next three years for specific quantities to be determined by the U.S. Navy from time to time. Government programs, which utilize these products, have lead times of several years before significant revenues are generated.

Significant portions of data acquisition and instrumentation recorder sales reflect purchases by prime contractors to the federal government, which can be subject to significant fluctuations. See “Markets.” In addition, other factors relating to the markets for our instrumentation products and to competition in these markets may affect future sales of these products. See “Distribution and Customers,” “Competition,” and “New Product Development and Industry Conditions.”

19-millimeter Products. Our 19-millimeter tape-based products include our DST and DIS tape drives and library systems and use core technology developed by us for our digital video recorders when we were active in the professional television market until 1992. Our DST tape drives are used to store digital data in formats such as SCSI and fibre channel that are typically utilized in the computer industry. Our DIS tape drives use specialized instrumentation formats that are primarily used in intelligence gathering. The drives use high-density metal particle tape cartridges, which are available in a range of sizes providing storage capacities from 100 to 660GB per cartridge in quad-density format. DST automated library systems incorporate multiple tape cartridges and tape drives and provide from 1.2 to 12.8 TB of storage capacity. Expansion modules can expand the DST library storage capacities up to approximately 100 TB. DST and DIS tape drives offer rapid access times to vast amounts of data that is maintained “near online" to allow it to be retrieved or archived quickly from or to very large data bases. We manufacture our 19-millimeter products to customer order. Since our Recorders segment is primarily focused on our data acquisition and instrumentation products, we do not currently intend to invest additional development resources to extend the life of our 19-millimeter products beyond the quad density format. However, we will conduct sustaining engineering to support our current customers’ requirements. See “Markets,” “Distribution and Customers,” “Competition,” and “New Product Development and Industry Conditions.”

Other Products. Data Systems’ other products are primarily television after-market products (including spare parts) relating to television products that we manufactured in prior periods and continue to support.

Markets

Data Acquisition/Instrumentati on Recorders. Data Systems’ DDRs, DSRs and DCRsi recording drives are designed to acquire large volumes of data in stressful physical environments and under severe vibration and shock conditions. These recorders are used extensively in airborne and naval intelligence acquisition and for the collection of test data during the design and qualification of aircraft. These products are used by U.S. and foreign military and intelligence agencies (including those of China, Germany, India, Japan, South America and the United Kingdom), as well as by manufacturers of commercial airplanes, such as Boeing, and other foreign airframe manufacturers. A significant portion of DCRsi products are also sold in versions that are intended for use in ground facilities for the long-term storage or analysis of data previously collected in mobile environments. Our DSRs and DDRs products have been developed to replace over several years a large installed base of DCRsi tape-based recorders.

U.S and foreign government agencies continue to be the primary market for our data acquisition and instrumentation recorders. Sales to government agencies are subject to fluctuation as a result of changes in government spending programs (including defense programs) and could be adversely affected by pressure on government agencies to reduce spending. Any material decline in the current level of government purchases of our products could have a material adverse effect on us.

19-Millimeter Products . Our 19-millimeter mass storage tape drives and library systems are optimized for applications that must handle large amounts of data, such as those that process and store images, digital video and streaming data. Government intelligence data gathering and archival storage are our principal markets.

Our products are used in a small number of specialized applications. Accordingly, we believe that our share of the overall data storage market is very small.

Distribution and Customers

Our data acquisition and instrumentation recorders (including our DIS 19-millimeter tape drives) are sold primarily to prime contractors who in turn sell to government agencies involved in data collection, satellite surveillance and defense-related activities, as well as to defense contractors and other industrial users for testing and measurement purposes. Sales of instrumentation recorders are made through our internal domestic and international sales forces, as well as through independent sales organizations in foreign markets. The government programs that involve our products are typically long-term in duration. Government procurement practices typically limit our customers’ purchase commitments with our recorders segment to one-year or less. Also, we typically operate with low levels of backlog and ship products ordered within a particular quarter in that quarter or the succeeding quarter.

We currently distribute our 19-millimeter products (including DST and DIS recorders) directly through our internal sales force, as well as through independent value-added resellers. With respect to our 19-millimeter recorders, we are not actively pursuing new government programs but continue to offer products to customers who desire to support or expand an existing program.

We currently operate a total of six sales and service offices, including four in the U.S., one in Japan and one in the United Kingdom.

Our sales to U.S. government agencies (either directly or indirectly through government contractors) represented approximately 46% of the Recorders segment revenue in fiscal 2006 compared to 59% in fiscal 2005 and 70% in fiscal 2004. Sales to government customers are subject to customary contractual provisions permitting termination at the government’s election. See “Markets.”

In 2006, in the Recorders segment, The Boeing Corporation and Lockheed Martin Corporation accounted for 14.9% and 10.0% of total revenue, respectively. In 2005 and 2004, no single Recorders segment customer accounted for more than 10% of total revenue.

Research, Development and Engineering

We have been developing high performance recording systems for the intelligence community for over 50 years. Until 1992, we also developed recording systems and special effects products for the professional television industry. In recent years, substantially all of our research and development activities have focused on our data acquisition and instrumentation recorders. Over the years, we have developed extensive expertise in a wide area of technical disciplines and have developed fundamental innovations in digital image processing, magnetic recording technology and communication channel electronics. In 2006, we spent approximately $4.4 million (17.6% of total Recorders segment revenue) for research and development programs and engineering costs, compared to $4.2 million (17.3% of total Recorders segment revenue) in 2005 and $3.9 million (13.8% of Recorders segment revenue) in 2004. Future research, development and engineering spending may need to be reduced if Data Systems were to experience further declines in product revenues. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 of the Notes to Consolidated Financial Statements.

In prior years, we designed and manufactured a wide range of professional television products. We patented many of our innovations, many of which remain in force. These technologies form the foundation of our digital imaging patent portfolio that we are seeking to exploit with new licensing agreements covering digital video camcorders, digital still cameras, camera equipped cellular phones, DVD recorders, and hard disk recorders.

In recent years, our Recorders segment has elected to focus on its data acquisition and instrumentation products. As a result, it has transitioned much of its research and development budget away from the 19-millimeter digital recording technology, to the recently developed DSRs and DDRs solid state- and disk-based recorders, which incorporate data interfaces, previously utilized in our DCRsi recorders. These products have largely been designed in response to unique and varied requirements of various U.S. and foreign government agencies and are being evaluated for inclusion in future intelligence gathering programs under consideration. As a result, our new products have been manufactured in limited quantities. New government programs typically undergo several years of evaluation before product specifications are established, prime and subcontractors selected, funding appropriated and contracts let. See “Recorder Segment Products—Data Acquisition/Instrumentati on Products” above. We do not plan to develop our 19-millimeter product lines beyond the quad density format. However, we will conduct sustaining engineering to support our current customers’ requirements.

All of our research, development and engineering efforts are conducted in-house. While we do not outsource our product engineering, in line with industry trends, we endeavor to utilize off the shelf components rather than to design our own components. Research and development is subject to certain risks and uncertainties described below under “New Product Development and Industry Conditions,” and there can be no assurance that any of these efforts will be technologically or commercially successful.

Patents, Licenses and Trademarks

As a result of our ongoing research and development expenditures, we have developed substantial proprietary technology, certain of which we have elected to patent or to seek to patent. As of December 31, 2006, we held approximately 450 patents and patent applications, including approximately 170 patents in the U.S. and approximately 280 corresponding patents in other countries. Also, there are approximately 25 U.S. and foreign patent applications pending. The majority of these patents and pending patents relate to our recording technology. We continually review our patent portfolio and allow non-strategic patents to lapse, thereby minimizing substantial renewal fees.

U.S. patents are, at present, in force for a period of 20 years from the date of application and patents granted by foreign jurisdictions are generally in force for between 14 years to 20 years from the date of application. We have obtained our present patents over the course of the past 20 years and, accordingly, have patents in force that will expire from time to time over the next 20 years. Patents are important to our current overall business, both as a source of protection of the proprietary technology used in our current products, and as a source of royalty revenue. While results of operations would be adversely affected by the loss or expiration of patents that generate significant royalty revenue, Management believes that none of our Recorder Segment product lines is materially dependent upon a single patent or license or group of related patents or licenses, and that timely introduction of products incorporating new technologies or particularly suited to meet the needs of a specific market or customer group is a more important determinant of the success of our current business.

In 2006, one licensee, Sony Corporation, accounted for 10.2% of total revenue. In 2005, one licensee, Matsushita Electric Industrial Co. Ltd., accounted for 11.9% of total revenue. In 2004, two licensees, Sony and Canon, accounted for 39.4% and 19.2% of total revenue, respectively.

It is not possible to predict the amount of royalty revenue that will be received in the future. Royalty revenue has historically fluctuated widely due to a number of factors that we cannot predict, such as the extent of use of our patented technology by third parties, the extent to which we must pursue litigation in order to enforce our patents, and the ultimate success of our licensing and litigation activities. We also expect to spend additional costs in future years in our investigation and analysis of how our digital video imaging and data compression technologies are being utilized by manufacturers of consumer digital video products. There can be no assurance that we will continue to develop or otherwise acquire patentable technology that will generate significant patent royalties in future years. We will continue to evaluate additional products and potential licensing opportunities to the extent that our technical and financial resources permit. In 2007, we intend to explore additional ways, including possible arrangements with independent patent research and evaluation companies and other third parties, to monetize our intellectual property. There can be no assurance that these expanded efforts will be successful.

We regard our trademark “Ampex” and our logo as valuable to our businesses. We have registered our trademark and logo in the U.S. and a number of foreign countries. U.S. trademark registrations are generally valid for an initial term of 10 years and renewable for subsequent 10-year periods. We have not granted any material rights to use our name or logo to any other third party.

Our trademarks used in this report include “Ampex”, “DCT”, “DST”, “DIS”, “DCRsi”, “DSRs” and “DDRs”, all of which are trademarks of Ampex Corporation. All other trademarks and service marks used in this report are the property of Ampex or their respective owners.

Manufacturing

Our Recorders segment’s products are manufactured at facilities in Redwood City, California and Colorado Springs, Colorado. Products are designed and engineered primarily in Redwood City.

We maintain insurance, including business interruption insurance, which Management considers adequate and customary under the circumstances. However, there is no assurance that we will not incur losses beyond the limits of, or outside the coverage of, our current insurance policies.

Sources of Supply

We use a broad variety of raw materials and components in our manufacturing operations. While most materials are readily available from numerous sources, we purchase certain components, such as customized integrated circuits, memory chips and flexible magnetic media, from a single domestic or foreign manufacturer. Significant delays in deliveries of, or defects in the supply of, such components could adversely affect our manufacturing operations pending qualification of an alternative supplier. In addition, we produce highly engineered products in relatively small quantities. As a result, our ability to cause suppliers to continue production of certain products on which we may depend may be limited. Manufacturers have required us in the past and may require us in the future to purchase lifetime quantities of certain products or components in advance of their discontinuing the product, requiring us to maintain inventory levels in excess of current period revenue forecasts. We do not generally enter into long-term raw material supply contracts. In addition, many of the components of our products are designed, developed and manufactured by us, and thus are not readily available from alternative sources.

CEO BACKGROUND

D. Gordon Strickland is our Chief Executive Officer and President. He has been an officer and director of Ampex since February 16, 2007. He also serves as non-executive chairman of Medical Resources, an operator of diagnostic imaging centers, a position he has held since December 2006. Prior to joining Ampex, Mr. Strickland served as chairman of Medical Resources from 1997 to December 2006, and as its chief executive officer from May 2004 to December 2006. From 2003 to 2004, he served as chief executive officer and president of MCSi, Inc., an integrator of audio/visual and broadcast systems. Mr. Strickland’s responsibilities at MCSi included overseeing the reorganization of MCSi prior to and during its filing under federal bankruptcy laws in August 2003. Mr. Strickland also served as chief executive officer and president of Capitol Wire, Inc., an internet-based news and information service, from 1999 to 2002. He currently serves as senior advisor to Hancock Capital Management, an affiliate of John Hancock Life Insurance Company, and as a director of Outlook Group, a privately held specialty printing company.

Ned S. Goldstein was elected as a director of Ampex on February 16, 2007. Mr. Goldstein is currently President and a director of M-CAM, Inc., a company specializing in intellectual property finance and monetization, having served in those capacities since February 1, 2007 and 1999, respectively. He served as general counsel of M-CAM from 2003 to 2007. He also served as an executive vice president, general counsel and secretary of Stone Canyon Entertainment Corp., an operator of mobile amusement parks, from December 2004 to January 2007, and currently serves as its general counsel. Mr. Goldstein is also a managing partner of DreamTeam Entertainment Group, a theatrical production company, a position he has held since its inception in November 2003. From 2000 to June 2003, he served as executive vice president, general counsel and secretary of Key3Media Group, Inc. (“Key3Media”), an owner and operator of information technology tradeshows and conferences. Key3Media filed for bankruptcy under Chapter 11 of the federal bankruptcy laws in February 2003. Mr. Goldstein was recommended for election as an Ampex director by ValueVest High Concentration Master Fund, Ltd. (“ValueVest”), which holds approximately 13.6% of our outstanding Class A Stock, according to ValueVest’s Schedule 13D/A filed with the SEC on March 21, 2007. ValueVest has entered into an agreement with M-CAM, Inc. (“M-CAM”), pursuant to which M-CAM has advised ValueVest with respect to its investment in Ampex, and both parties may enter into future transactions with Ampex in order to seek to maximize the value of our intellectual property portfolio.

Alain C. Briançon has been a director of Ampex since March 5, 2007. Dr. Briançon is currently the chief technology officer of NTERA, Inc., a position he has held since 2005. NTERA is a venture capital-backed company which is involved in the design and commercialization of state-of-the-art digital displays. From 2001 to 2005, Dr. Briançon served as the CTO of InterDigital Communications Corporation, a leading technology licensing company to cellular and other wireless markets. He held senior technology positions at Motorola, Inc. from 1995 to 2000.

Douglas T. McClure, Jr., has been a director of Ampex since February 1995. Mr. McClure has been a partner with G. C. Andersen Partners, LLC, a merchant banking firm, since January 2002. Prior to that, he was a managing director of The Private Merchant Banking Company, a position he held since February 1996. From 1992 to 1994, he was a managing director of New Street Capital Corporation, a merchant banking firm, and from 1987 to 1992, he was a managing director of Drexel Burnham Lambert Incorporated.

Craig L. McKibben is Vice President, Chief Financial Officer and Treasurer of Ampex. Mr. McKibben has been an officer and a director of Ampex and our predecessors since 1989. He also serves in the following capacities with our other subsidiaries: as vice president and treasurer of Ampex Data Systems Corporation, as director, vice president and treasurer of Ampex Holdings Corporation, and as director, president and chief financial officer of Ampex Finance Corporation. Mr. McKibben is an officer and director of Sherborne Holdings Incorporated and Sherborne & Company Incorporated. These entities, which are private investment holding companies, may be deemed to be our affiliates. He is also a member of Sherborne Investors GP, LLC and Sherborne Investors Management GP, LLC (together, “Sherborne Investors”), each of which is engaged primarily in the business of serving as general partner of the general partner or managing member, and investment manager, respectively, of certain securities investment funds. From 1983 to 1989, he was a partner at the firm of Coopers & Lybrand L.L.P., a predecessor of PricewaterhouseCoopers LLP, independent public accountants.

Peter Slusser has been a director of Ampex since March 1992. Since July 1988, Mr. Slusser has been the president and chief executive officer of Slusser Associates, Inc., a private investment banking company. From December 1975 to March 1988, he was managing director and head of mergers and acquisitions for PaineWebber Incorporated. Mr. Slusser currently serves as a director of Sparton Corporation, an undersea defense products and electronics contract manufacturer, and a director and audit committee member of Unigene Laboratories, Inc., a biopharmaceutical company engaged in the research, innovation and delivery of small proteins for medical use.

COMPENSATION

Components of Executive Compensation

In order to achieve our objectives for compensation, we provide several different components of compensation for our named executives. These components consist of salary, discretionary bonus, incentive bonus, employee stock options under our Stock Incentive Plan, awards under our Stock Bonus Plan, and retirement and other benefits.

Salary. The Compensation Committee establishes base salaries for our named executives to compensate them for their services to Ampex during the fiscal year. Salary amounts are fixed, and are not tied to Company or individual performance. The Compensation Committee determines base salary amounts for each named executive by reviewing salaries paid to other executives in comparable positions with other companies of our relative size, and by considering management’s recommendations with respect to the named executive’s performance and contributions to Ampex, and whether the executive was involved in activities other than employment by the Company.

Based on available data reviewed by the Compensation Committee, we believe that the base salary paid to our CEO during 2006 was significantly below the median salary for comparable positions with other similar companies. The aggregate amount of base salaries we paid to our other named executives as a group was below the median base salary amount paid to executives holding comparable positions in other high-technology companies.

The Compensation Committee may grant salary increases from time to time based on a named executive’s individual performance, competitive factors within the industries in which we operate, our ability to pay such increases, and other factors. Salary amounts paid to our named executives for fiscal 2006 did not increase from 2005 levels.

Discretionary Bonus Awards. We pay discretionary cash bonuses to our CEO and to each of our other named executives in order to reward their individual performance and contributions to Ampex. At the end of each fiscal year, the Compensation Committee determines the amount of discretionary bonus to be awarded to our CEO for the completed fiscal year, based upon his contribution to our performance during that year. The Compensation Committee also determines the maximum aggregate amount of discretionary bonuses that may be awarded at the end of each fiscal to our other named executives for their performance during the completed fiscal year, and delegates to our CEO the authority to allocate these amounts to the named executives, based upon their individual performance and contributions in their particular areas of responsibility.

For 2006, the Compensation Committee did not award any discretionary bonus to Mr. Bramson, who resigned as our CEO in February 2007. The Compensation Committee determined that the aggregate amount of discretionary bonuses available for the Company’s other executive officers for their performance and contributions to Ampex during 2006 was $500,000. In determining this aggregate amount, the Committee took into account the Company’s financial performance during 2006, the recommendations of Mr. Bramson with respect to the individual performance and contributions of certain named executives, and the amount of incentive bonus awards payable by Ampex to certain of the named executives for their achievements during 2006, as discussed below under “Incentive Bonus Awards.” Pursuant to the discretionary authority delegated to him by the Compensation Committee, Mr. Bramson allocated discretionary bonus awards of $150,000, $25,000 and $85,000, respectively, to three of our named executives, Messrs. Atchison, Talcott and Venema, as set forth under the “Bonus” column in the “Summary Compensation Table” included below in this proxy statement. Mr. Bramson allocated the discretionary bonus to Mr. Atchison in recognition of his contributions to the successful completion of engineering projects necessary to launch certain of Ampex Data Systems Corporation’s new products. In allocating the discretionary bonuses to Messrs. Talcott and Venema, Mr. Bramson considered the individual performance and contributions of these named executives during 2006, as well as the amount of discretionary bonus awards paid to the named executives in prior years. The 2006 discretionary bonus awards were paid to Messrs. Atchison, Talcott and Venema in January 2007 for their performance and contributions during fiscal 2006 .

Incentive Bonus Awards. We also pay cash incentive bonuses to certain of our named executives under written incentive agreements entered into between Ampex and the named executive. The amount and timing of these incentive awards is based upon the accomplishment of specific objectives by the individual named executive, and/or the achievement of specific financial performance levels by the Company. These target levels and amounts are pre-determined by the Compensation Committee, based upon recommendations by our CEO. For 2006, we paid a total of $623,615 of cash incentive bonus awards to our named executives pursuant to written incentive agreements, as described in the following paragraphs.

Of this amount, we paid an incentive bonus of $150,000 to our CFO, Craig L. McKibben. This amount was based upon his achievement of three specific performance goals for 2006 set forth in his incentive agreement. These goals included timely completion of compliance with our regulatory obligations regarding documentation, testing and assessment of our internal controls, developing a plan to streamline and relocate certain of our accounting functions, and supporting the operations of our Licensing segment with quantitative data. We paid the full amount of this incentive bonus to Mr. McKibben in January 2007 for his performance and contributions during fiscal 2006.

In addition, we paid an incentive bonus of $350,000 to Robert L. Atchison, our Vice President, pursuant to his incentive agreement. This amount was based upon the level of income before taxes realized in 2006 by Ampex Data Systems Corporation, which conducts the activities of our Recorders segment, and was paid to Mr. Atchison in January 2007. Mr. Atchison is responsible for all of the operating activities of this segment of our operations.

We also paid an incentive bonus of $123,615 to Joel D. Talcott, our Vice President and General Counsel, who is responsible for our patent licensing activities. Under Mr. Talcott’s incentive agreement, this amount was calculated as a percentage of certain running rate and lump sum royalties received by Ampex during each of the six month periods ended June 30 and December 31, 2006, from certain licensees for specific products under our patent licensing program. We paid $50,032.65 of this amount in August 2006, and $73,581.95 in January 2007, in accordance with the terms of the incentive agreement, which required the calculation of the incentives at the end of each six-month period.

Stock Incentive Plan . Our Stock Incentive Plan provides for the granting of stock options and stock appreciation rights with respect to our Class A Stock to our directors, executive officers and other employees and service providers. The purpose of the Stock Incentive Plan is to provide incentives for these participants to maximize the value of our Class A Stock. Through the Stock Incentive Plan, we seek to align the long-range interests of our employees with the interests of our stockholders, as these employees build an ownership interest in the Company.

The Stock Incentive Plan Committee makes all decisions with respect to options granted under the Stock Incentive Plan, including the number of shares subject to each award, the grant date, exercise price, expiration date, vesting schedule and other terms and conditions of the award. These determinations are subject to the limitations set forth in the Stock Incentive Plan, and may in certain cases be made by the Stock Incentive Plan Committee based upon the recommendation of management with respect to the specific contributions and performance of certain employees and participants, which must be consistent with the terms set forth in the Stock Incentive Plan.

Awards under the Stock Incentive Plan may be either options or stock appreciation rights. Options may be either incentive stock options (“ISOs”) meeting the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or non-qualified stock options (“NQSOs”) not meeting the requirements of Section 422 of the Code, and entitle the holder to purchase shares of our Class A Stock upon exercise of the option and payment of the exercise price. Rights may be granted either as an alternative to or in tandem with the exercise of all or any portion of an option granted to a rights holder or independent of any options granted. A right entitles the holder to receive, upon exercise of the right, shares of Class A Stock equal in value to the difference between the fair market value on the date of grant of the number of shares covered by the right and the fair market value of such shares on the date of exercise plus cash for any fractional share.

For NQSOs, the exercise price must be at least equal to 100% of the fair market value per share of Class A Stock on the date the NQSO is granted. For ISOs, the exercise price also must be at least equal to 100% of such fair market value on the date of grant, or 110% of such fair market value for an ISO granted to a person owning 10% or more of the total combined voting power of all classes of our stock or the stock of any parent or subsidiary of Ampex. Under the Stock Incentive Plan, fair market value is based upon the closing price of our Class A Stock on the last trading day immediately before the grant date, as listed in Nasdaq. Awards granted under the Plan must be exercised within ten years of the grant date, except that an ISO granted to a 10% stockholder must be exercised within five years of the grant date. Unless otherwise specified by the Stock Incentive Plan Committee for a particular award, awards vest over four years at the rate of 25% each year after the date of grant, provided that the award recipient is continuously employed by Ampex during that time. Each award is evidenced by a Stock Option Agreement (for options) or a Rights Agreement (for rights).

The Stock Incentive Plan Committee generally grants awards to our outside directors on an annual basis in May of each year, but does not meet regularly to grant awards to our executive officers. Upon the recommendation of our management, the Stock Incentive Plan Committee will meet to consider granting awards to named executives. The Committee did not grant any awards to our named executive officers under the Stock Incentive Plan during fiscal 2006, pending management’s review of alternative forms of stock compensation and the accounting effects of such plans as compared to the accounting effects of stock options.

Stock Bonus Plan. Our Stock Bonus Plan provides for the issuance of shares of Class A Stock as stock bonuses or direct stock purchase rights to our directors, executive officers and other key employees, and to certain consultants, advisers and service providers. The primary purposes of the Stock Bonus Plan are to permit Ampex to pay non-cash, equity compensation to eligible individuals for services provided to us, and to encourage continued service with Ampex and the achievement of certain performance objectives by such individuals. The Stock Bonus Plan Committee believes that any grants made under the Stock Bonus Plan will enable us to attract and retain highly qualified employees in our core businesses, align the long-range interests of our employees with the interests of our stockholders, and conserve cash that might otherwise be required to pay compensation to eligible individuals.

The Stock Bonus Plan Committee makes all decisions with respect to awards made to named executives under the Stock Bonus Plan (subject to the terms of the Plan), including with respect to the number of shares awarded, the grant date, the purchase price of stock purchase awards, the value of any stock bonus awards, the vesting schedule, if any, and other terms and conditions. In making its decisions with respect to awards under the Stock Bonus Plan, the Stock Bonus Plan Committee may take into consideration management’s recommendations with respect to any specific participant.

Under the Stock Bonus Plan, the Stock Bonus Plan Committee sets the purchase price per share of stock granted in connection with stock purchase rights, and the value of stock awards granted as bonuses, neither of which may be less than the fair market value per share on the date the awards are granted. Fair market value is based upon the closing price of our Class A Stock on the last trading day immediately before the grant date on the national securities exchange on which our shares are then listed or admitted to trading (currently, Nasdaq). Any purchase price for stock purchase rights must be paid to us in cash or by check. In addition, grantees may be required to pay us a nominal amount in connection with stock bonus awards in order to comply with state laws precluding issuances of securities for less than the par value of the shares.

The awards may either be vested or unvested upon grant. In the case of unvested shares, they are subject to vesting at such later date as specified in the terms of the particular award, and until such vesting date, the grantee has the obligation to surrender, and we have the right to repurchase, the unvested shares under the conditions set forth in the Stock Bonus Plan.

The Stock Bonus Plan Committee did not grant any awards to the named executives under the Stock Bonus Plan during fiscal 2006, and granted 1,000 shares of restricted Class A Stock to its three outside directors in June 2006. The shares of restricted stock granted to directors had a fair market value of $11.41 per share on the grant date, and will vest on the date of the 2007 Annual Meeting. Prior to the vesting date, the shares may not be transferred (except by will or the laws of descent and distribution), but may be voted by the holders.
Retirement Plans. We maintain two retirement plans for certain employees, including certain named executives, that provide for payments and other retirement benefits: the Ampex Corporation Employee’s Retirement Plan (“Retirement Plan”) and the Ampex Corporation Supplemental Retirement Income Plan (“Supplemental Plan”).

The Retirement Plan is a defined benefit plan that provides for payments to covered employees following their retirement. These benefits are generally determined by the employee’s years of credited service, as determined under the Retirement Plan, and his or her average annual earnings during the highest 60 consecutive months of the last 120 consecutive months of service. Effective February 1, 1994, the accrual of additional benefits under the Retirement Plan was discontinued, and accordingly, both the number of years of credited service, and the final average annual earnings were frozen at the levels they were as of that date. There are no employee contributions to the Retirement Plan, and the benefits payable are not subject to any deduction for social security or other offset amounts. All of the named executives, except for Messrs. Bramson and McKibben, participate in the Retirement Plan. See “Pension Benefits” below for additional information regarding the Retirement Plan.

The Supplemental Plan is a non-qualified retirement plan that we maintained in prior years for certain executive officers, which provided them with supplemental retirement income based on their time in service and final average earnings. The Supplemental Plan was terminated on December 31, 1987. Mr. Talcott is the only named executive who participates in the Supplemental Plan, and his years of credited service and final average earnings have also been frozen at 1987 levels. See “Pension Benefits” below for additional information on the Supplemental Plan.

Termination and Change-in-Control Benefits. We have entered into employment security agreements with each of our named executives (other than Mr. Bramson), pursuant to which he is entitled to continuation of his salary and certain benefits for 12 months following any Change of Control (as defined) of Ampex that occurs before January 17, 2009, if the named executive is terminated, his compensation and benefits are reduced to less than 90% of then-current compensation and certain benefits, or he is relocated to a work location more than 50 miles from his current work location by Ampex or our successor. These agreements are more fully discussed below under “Employment Agreements; Potential Payments Upon Termination or Change-in-Control.”

Other Employee Benefits. As employees, our named executives have the opportunity to participate in a number of benefit programs that are generally available to all of our regular U.S. employees. These benefits include:

• Healthcare Plans: medical, dental and vision plans and an employee assistance program.

• Life and Disability Plans: life insurance, accidental death and dismemberment insurance, long term disability insurance and a salary continuance program .

• Investment Plans: All of our employees, including the named executives, are entitled to participate in the Ampex Corporation Savings Plan, which is an employee-contributory savings incentive plan intended to qualify under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). We match 50% of all amounts contributed by employees to the 401(k) Plan, up to a maximum of $8,000 contributed by each participating employee. Employees may contribute more than $8,000 to the 401(k) Plan, but we will not match any portion of such excess; accordingly, our contributions to each employee will be capped at $4,000.

Executive Perquisites

Executive perquisites do not play a significant role in our executive compensation program, and are kept to a minimal level. There were no perquisites during 2006 requiring disclosure in our “Summary Compensation Table,” below.
Accounting and Tax Implications

In making decisions regarding the various components of our compensation program, we and our Compensation, Stock Incentive Plan and Stock Bonus Plan Committees consider the anticipated cost and accounting treatment of the various components of executive compensation. Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payments,” or SFAS No. 123R, relating to accounting for stock options and other stock-based awards.

Section 162(m) of t he Internal Revenue Code of 1986, as amended, limits our ability to deduct, for income tax purposes, certain executive compensation in excess of $1.0 million paid to any named executive in a single tax year. Our Compensation Committee has considered the effect of Section 162(m) on our executive compensation program. The Compensation Committee generally intends to satisfy the requirements for deductibility under Section 162(m). However, in order to maintain flexibility in compensating our executive officers in accordance with our compensation goals and the best interests of Ampex and its stockholders, the Committee does not require that all compensation paid to our named executives be deductible under Section 162(m). Accordingly, some compensation that we paid to our named executives in fiscal 2006, or will pay in future years, may not be fully deductible.
Developments in 2007

As discussed above, in February 2007, our former Chairman and CEO, Edward J. Bramson, resigned all of his positions as an officer and director of Ampex, and our Board elected D. Gordon Strickland as our CEO, President and a director. We entered into an employment agreement with Mr. Strickland and a severance agreement with Mr. Bramson, the terms of which are described below under “Employment Agreements; Potential Payments Upon Termination or Change-in-Control.” In addition, we expanded the size of our Board and added two additional directors, Alain C. Briançon and Ned S. Goldstein, who will also serve on our Compensation, Stock Incentive Plan and Stock Bonus Plan Committees. Dr. Briançon will also serve on our Audit Committee. See “Proposal No. 1 — Election of Class I Directors.”

MANAGEMENT DISCUSSION FROM LATEST 10K

General

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our most significant estimates and assumptions, including those related to revenue recognition, bad debts, warranty obligations, inventories, pension costs and unfunded accumulated benefit obligations, litigation expense and environmental obligations. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates.

We believe the following critical accounting policies affect our more significant estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with applicable accounting standards including Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” and American Institute of Certified Public Accountants’ (the “AICPA”) Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended. Revenue is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery and acceptance has occurred or services have been rendered, (3) the fee is fixed or determinable, and (4) collection is reasonably assured. We derive our revenues from two principal sources: license fees (including royalties) through our Licensing segment, and product and parts sales and service contracts through our Recorders segment.

Determination of criteria (3) and (4) are based on Management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause Management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Our revenue recognition policy with respect to royalty income is as follows: when we enter into an agreement with a new licensee for use of our patents, we may receive settlement of “past due” royalties. This is a negotiated amount and is typically paid by the licensee within 30 days of signing the license agreement. Past due royalties cover the licensee’s product shipments from the period when they were first notified of infringement up through the effective date of the license. We may also negotiate a “prepayment” of royalties that would otherwise be due up to a specific future date. The amounts due under our negotiated agreements for both past due royalties and prepayment of royalties are non-refundable and non-forfeitable. We recognize both past due and prepayment amounts as revenue in the period when the agreement has been executed by both parties, which is when there is persuasive evidence of an arrangement, fees become fixed or determinable and collection becomes probable, as we have no future obligations with respect to these agreements and delivery has occurred. Alternatively, our licensing agreement may include a “running” royalty which covers products shipped by the licensee in the current period after the date that the license agreement has been entered into and until the patent has expired or when the patent is no longer contractually available to the licensee, if shorter. Our running royalties are computed as a percentage of the selling price of the licensee’s products and are paid quarterly in arrears and recognized as revenue at the time the amount of the quarterly royalty payment becomes determinable, generally upon receipt of the licensee’s sales report upon which royalties are determined, and collection is reasonably assured.

Revenue on product sales and services is recorded when all of the following have occurred: an agreement of sale exists, product delivery (principally FOB Ampex Factory) and, where applicable, acceptance has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured. Service revenue is recognized ratably over the life of the service contract.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results.

Inventories

We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. Abnormal amounts of facility expense, freight, handling costs and scrap material are excluded from inventory cost and expensed during the period in which they are incurred. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next eighteen months. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. We also maintain an inventory of spare parts to service our customers’ products after the date of sale. We amortize spare parts inventories over the expected number of years we expect to support such products but not in excess of 30 months. If actual market conditions are less favorable than those projected by Management, additional inventory write-downs may be required. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. If our inventory were determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. We make every effort to ensure the accuracy of our forecasts of future product demand, however, any significant unanticipated change in demand or technological development could have a significant impact on the value of our inventory and our reported operating results.

Deferred Taxes

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

We must assess the likelihood that we will be able to recover our deferred tax assets and net operating loss carryforwards. We must increase our provision for taxes by recording a valuation allowance against the deferred tax assets and net operating loss carryforwards that we estimate will more likely than not ultimately not be recoverable. Although we reported net income in 2004 and 2005, we have reported losses in recent years and during 2006. Accordingly, we cannot determine that it is more likely than not that we will recover our deferred tax assets and net operating loss carryforwards, and therefore have established a valuation allowance equal to such assets. If we recognize and/or realize deferred tax assets or net operating loss carryforwards in subsequent years, through absorption of taxable income or reversal of deferred tax asset reserves, our tax provision in that period will be less than the statutory tax rate.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.

Warranty

Products sold are generally covered by a warranty for periods ranging from 90 days to one year. We accrue a warranty reserve at the time of sale for estimated costs to provide warranty services. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in decreased gross profit.

Results of Operations for the Three Years Ended December 31, 2006

Licensing Revenue. Licensing revenue was $10.8 million in 2006, $28.9 million in 2005 and $72.9 million in 2004. Licensing revenue is derived from royalties that we receive from licensing our patents.

Licensing revenue in 2006 totaled $10.8 million. We earned running royalties of $7.7 million from manufacturers of digital camcorders, $2.1 million from manufacturers of digital still cameras and $1.0 million from manufacturers of other products, largely DVD recorders. Licensing revenue in 2005 totaled $28.9 million, of which $18.7 million related to negotiated settlements covering past use and in some cases a prepayment of royalty obligations through April 2006, the expiration date of the “121” patent used in digital still cameras. In 2005, we earned running royalties of $5.1 million from manufacturers of digital camcorders, $4.5 million from manufacturers of digital still cameras and $0.6 million from other products. Due to the expiration of the “121” patent, the terms and periods covered by these agreements, license revenues are not comparable between periods nor indicative of amounts that may be realized in future years.

Licensing revenue recognized in 2005 and 2004 included one-time royalty settlements totaling $18.7 million and $65.5 million, respectively, that pertained to settlement of royalties due on products sold in periods prior to the execution of the license, and in some cases included prepayment of licensees’ obligations covering future periods. There were no one-time royalty settlements in 2006. The balance of licensing revenue recognized of $10.8 million in 2006, $10.2 million in 2005 and $7.4 million in 2004, represented running royalties on product shipments calculated as a percentage of current period sales reported to us within 35 days after the end of the respective quarter. Due to one-time royalty settlements covering prior and future periods, licensing revenues are not comparable between the periods presented and are not indicative of licensing revenues to be received in future periods.

In 2005, one-time royalty settlements from agreements entered into at that time with certain manufacturers of digital still cameras provided for payments totaling $15.9 million and pertained to settlement of royalties for the use of our “121” patent through April 11, 2006. We also completed a license agreement with Samsung Electronics (“Samsung”) and received a one-time royalty settlement of $2.8 million, less foreign withholding taxes of $0.5 million, which covers Samsung’s liability for past use and a non-refundable, non-forfeitable prepayment of royalties due through 2008 on several of our U.S. and foreign patents in the manufacture and sale of digital tape recorders, including MiniDV camcorders. It also permits Samsung to use certain of our patents in other camcorders utilizing hard disk drive, optical or solid state memories.

In 2004, we entered into separate licensing agreements with Canon Inc. (“Canon”), Sanyo Electric Co. Ltd. (“Sanyo”) and Sony Corporation (“Sony”). The agreements with Canon and Sanyo permit their use of various U.S. and foreign patents owned by us in the manufacture and sale of digital still cameras. The Sanyo agreement also permits use of our patents in camera equipped cellular telephones. These two manufacturers made payments in 2004 totaling $25.5 million. That amount included a negotiated prepayment of $13.5 million, which is non-refundable and non-forfeitable, from one of the licensees that covers royalties due on sales through April 11, 2006. The Sony agreement permits use of our patents in many products that they manufacture, including digital video camcorders, digital still cameras, camera equipped cellular telephones and other similar products. We received the Sony settlement payment in 2004, which totaled $40 million and covered liability for past use and prepayment of royalties due on all product shipments through April 11, 2006. The Sony agreement does not specify how the lump sum payment was allocated among its various products or license periods covered.

Many of our licensees prepaid for the use of our patents through April 11, 2006, which coincides with the U.S. expiration of the “121” patent. While our digital still camera license agreements permit licensees to use several of our digital imaging patents, by agreement, we only received royalties on the “121” patent through its expiration date.

After April 11, 2006, our digital still camera licensees are required to pay royalties only to the extent that their products incorporate any of our other digital imaging patents. These patents have expiration dates from 2011 through 2014. We have conducted numerous technical and business meetings to discuss our feed forward quantization patent that we believe is being used, but we have not been able to conclude an acceptable arrangement with our licensees to cause them to resume payment of royalties on digital still cameras or camera-equipped cellular phones sold after April 11, 2006. In the third quarter of 2006 we expanded our research activities with the goal of assessing whether other patents, including image data shuffling and high speed image decoding, are being used in these products. If these expanded research activities successfully demonstrate use of one or more of our patents, current licensees would be obligated to resume payments under the existing terms of our license agreements, which we believe are favorable to the manufacturers. We do not expect to be able to assess the effectiveness of these efforts until later in 2007. If these negotiations are not successful and our licensees do not agree to resume such payments for our patents that we successfully demonstrate are used in their products, then we would be entitled to seek to cancel our license agreements with them and pursue our other options, including possible litigation.

The worldwide value of the digital still camera market in 2006 has been estimated by IDC, an independent market research firm, to total approximately $30 billion. Because our other digital imaging patents are registered in the U.S. as well as key international markets, if our digital still camera licensees acknowledge their use of our other digital imaging patents, we could realize a material increase in licensing revenues in future periods compared with the amount of royalties received from our “121” patent, but we cannot assure you that this will occur.

In prior years, we formally notified major manufacturers of camera equipped cellular telephones and other products that are equipped to record still and/or motion video that they may be infringing our patents. During 2005, we have held technical meetings and have issued claim charts alleging infringement of our feed forward quantization patent to two manufacturers of camera equipped cellular telephones. The worldwide retail sales value of the camera equipped cellular telephone market in 2006 has been estimated by IDC to total approximately $50 billion. We seek to charge these manufacturers what we believe are commercially reasonable licensing fees computed as a percentage of the licensee’s selling price of products shipped. Due to the size of this market, we could realize a material increase in royalty income in future years if we are successful in concluding licensing agreements with manufacturers of camera equipped cellular telephones. However, to date, none of the manufacturers of camera equipped cellular telephones are paying royalties to us for use of our feed forward quantization patent. Licensing negotiations have historically taken several years to conclude. There can be no assurance that we will successfully conclude camera equipped cellular telephone licensing agreements in the near term, if at all.

We have six license agreements covering all of the major manufacturers of digital video camcorders. Certain of these manufacturers have in prior years prepaid their royalty obligation through various future dates. In December 2004, Sony made a $40 million royalty prepayment covering numerous digital imaging products. Their prepayment expired on April 11, 2006, and they have begun paying us running royalties on digital camcorder shipments subsequent to April 12, 2006. Running royalties are subject to seasonal factors, with royalty payments received in the fourth and first quarters typically greater than in the second and third quarters.

We are receiving running royalties from one manufacturer of DVD recorders, which are not significant to total licensing revenues. We are in discussions with additional manufacturers who we believe may license our patents for use in DVD and hard disk recorders. If successful, these discussions might lead to further increases in royalties from these products, although we cannot assure you that any such increases will occur.

Our relevant digital imaging patents were developed when we manufactured still stores, video special effects products and digital videotape recorders, which we sold into the professional broadcast and postproduction markets in prior years. As discussed above, these patents have expiration dates from 2006 through 2014. After they expire, our future licensing revenues are expected to decline materially.

Product Revenue. Product revenue generated by our Recorders segment increased to $16.8 million in 2006 from $15.4 million in 2005 compared to $19.8 million in 2004. Government agencies and defense contractors are currently our principal market for the Recorders segment. Prior to 2006, sales declines had resulted from our decision not to seek new government program involvement with our mass data storage products and to focus our product development and marketing efforts on data acquisition products. Government agencies and defense contractors have historically experienced significant pressure to reduce spending and we expect them to experience such pressure in the future, which may lead to further sales declines. In 2004, we introduced our DDRs and DSRs instrumentation recorders, which are disk-based and solid state memory-based data acquisition recorders used in intelligence gathering activities. These products are intended to replace, over several years, a large installed base of our DCRsi tape-based data acquisition recorders. If successful, these new products could lead to increased product revenues over current levels. While we have recently been awarded significant multi-year contracts for our disk- and solid state-based instrumentation recorders, there can be no assurance that these new products will attain the same level of market penetration that our earlier products achieved. Revenues in 2006, 2005 and 2004 from such products totaled $7.7 million, $5.7 million and $0.9 million, respectively.

Our backlog of firm orders was $5.9 million at December 31, 2006 compared to $9.1 million at December 31, 2005 and $3.7 million at December 31, 2004. We were awarded a contract of approximately $6.9 million from Boeing for our new disk- and solid state-based data instrumentation recorders to be used in the development of the 787 airplane. We have made initial deliveries of our recorders in the amount of $3.6 million against this contract and the remainder is scheduled to be delivered in 2007. The undelivered value of the contract has been included in reported backlog as of December 31, 2006. In addition, we received orders from Boeing and the U.S. Navy, which are not included in backlog at December 31, 2006. We are to provide Boeing up to $2.9 million of solid state-based data instrumentation recorders with an option for a further $1.1 million subject to Boeing’s authorization. This product is for use in a government defense related program. We have shipped $0.8 million against this order. Shipments for the remainder will be made over the next three years but are not included in our backlog since the contract contains provisions whereby Boeing may terminate portions of the order up to 30 days prior to scheduled delivery upon payment of penalties depending on the termination date. We were also approved by the U.S. Navy to provide up to $5.0 million of these newly introduced products. We have shipped $0.4 million against this order. Future deliveries under this approval will be subject to receipt of purchase orders over the next three years for specific quantities to be determined by the U.S. Navy from time to time. We typically operate with low levels of backlog, requiring us to obtain the majority of each period’s orders in the same period that they must be shipped to the customer. Historically, a small number of large orders have significantly impacted sales levels and often orders are received late in the quarter, making it difficult to predict revenue levels in future periods. See “Fluctuations in Operating Results; Seasonality and Backlog of Recorders Segment.”

Service Revenue. Total service revenue generated by our Recorders segment in the year ended December 31, 2006 was $8.3 million compared to $8.9 million for the year ended December 31, 2005 and $8.7 million for December 31, 2004. We expect that service revenue will decline over time as older tape-based products are replaced with newer disk- or solid state memory-based instrumentation recorders.

Intellectual Property Costs. Intellectual property costs include external legal costs as well as certain internal costs, described below, pertaining to the enforcement of our patents. Intellectual property costs also include external accounting costs incurred in investigating the validity and enforceability of our patents and auditing royalty reports. Intellectual property costs fluctuate widely between periods based primarily on whether or not we are pursuing patent litigation. During the years ended 2006, 2005 and 2004, we incurred significant external legal costs in preparing for patent enforcement suits in the ITC and in the District Court that totaled $8.6 million, $9.5 million and $4.9 million, respectively. The ITC case was withdrawn to enable the District Court case to proceed. Because our suit against Kodak is on appeal, our external litigation costs are expected to significantly decrease during 2007. If the appeal is successful and the case is remanded for trial, we could then have significant legal expenses if we elect to continue litigation. While our strategy is to negotiate reasonable royalty agreements, we may seek to enforce our patents by instituting additional litigation against other manufacturers of digital still cameras and other products where our technology is being used, if licensing agreements are not completed on satisfactory terms. There is no direct cost of goods sold associated with licensing revenue . We have an internal staff of lawyers, engineers and employ outside contractors that are principally involved in negotiating and monitoring our licensing agreements. Their compensation, travel expenditures and other direct costs are included as intellectual property costs. We do not allocate any general corporate overhead to our Licensing segment. Compensation includes incentive payments under long-term incentive plans earned by our employees based on amounts collected from our licensees. We also expect to incur additional costs in future years investigating and analyzing whether manufacturers of consumer digital imaging products are utilizing our other digital imaging and data compression technologies. We may seek to engage independent patent research and evaluation companies and other third parties, to help monetize our intellectual property. We may also seek to acquire patent portfolios that we believe offer commercial value to our licensing program. However, we cannot assure you that any of these strategies will be implemented or, if implemented, will be successful.

Cost of Product Revenue. Cost of product sales includes the cost of materials, labor and overhead incurred in the manufacture of our products. Cost of product sales as a percentage of product revenue was 50.5% in the year ended December 31, 2006 compared to 61.4% in the year ended December 31, 2005 and 70.6% in the year ended December 31, 2004. Our cost of product sales percentage fluctuates based on a number of factors, including the volume and mix of product shipped in the period. The higher cost of product sales percentage in 2004 when compared to 2006 and 2005 was due, in part, to additional inventory provisions of $1.1 million for excess and no requirements inventory to lower the carrying value of older products and spare parts based on sales projections for these products. In 2005 and 2006, we had improved gross margins due to the effect of selling lower cost remanufactured DST and DCRsi recorders.

Cost of Service Revenue. Cost of service revenue includes materials and labor used in maintaining and repairing our customers’ systems that we provide under service contracts. Cost of service revenue as a percentage of service revenue was 27.2% in 2006 compared to 31.2% in 2005, and 31.3% in 2004. The cost of service revenue fluctuates based largely on the level of services we provide to repair or replace equipment in a particular period and the cost of material used to repair or replace such equipment.

Research, Development and Engineering Expenses. All of our research, development and engineering expenses relate to our Recorders segment. The increase in research, development and engineering expenditures during 2006, 2005 and 2004 is due primarily to an increase in engineering personnel coupled with costs incurred to produce peripheral products to enhance the DDRs ruggedized disk- and DSRs solid state memory-based data acquisition recorders. Such costs are expected to continue as we develop new and enhanced products. We do not currently plan to invest additional resources to develop new formats for our 19-millimeter mass storage products beyond the quad density format. However, we will incur sustaining engineering to support our customers’ requirements.

Selling and Administrative Expenses. Selling and administrative expenses decreased to $13.8 million in the year ended December 31, 2006 from $15.9 million in the year ended December 31, 2005 and $13.8 million in the year ended December 31, 2004.

In 2005, accounting costs included $0.5 million related to documenting, assessing and auditing internal controls required by the Sarbanes Oxley Act (we were an accelerated filer as of December 31, 2005) and $0.2 related to the restatement of prior years’ financial statements to correct the accounting for the Media pension plan. Beginning in 2006, we began to expense the fair value of stock options and restricted stock awards over the period such options and awards vest. We expensed $0.4 million during 2006. In prior years, the issuance of stock options did not affect our operating results.

Corporate selling and administrative expenses also included business development expenses to identify new investment and other income-generating opportunities. Business development expenses, including consulting fees and office rent paid to a British investment advisory company, totaled $0.3 million, $1.0 million and $0.6 million in 2006, 2005 and 2004, respectively. We discontinued payments to the investment advisory company on April 1, 2006. In 2006 and 2004, we received reimbursement of $1.5 million and $0.6 million, respectively, of business development expenses incurred from 2003 to 2006. See “Note 13—Related Party Transactions” of the Notes to Consolidated Financial Statements.

In 2005, we also incurred additional nonrecurring fees related to our Nasdaq National Market listing of $0.1 million and other legal settlement costs of $0.2 million.

Restructuring Charges (Credits). We vacated certain administrative offices in Redwood City, CA in 2001 and 2002 to consolidate operations to lower continuing operating expenses and recorded a net restructuring charge of $4.2 million. In 2003, we established an additional reserve of $3.1 million to reflect the inability to sublease the premises due to the continued depressed real estate market. In 2004, we decided to seek a buyer for our Colorado Springs manufacturing facility and reutilize, in part, the Redwood City leased facilities that had been charged to restructuring in prior periods. As a result, we recognized a restructuring credit of $1.4 million. We remeasured the restructuring accrual pursuant to SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Lease costs associated with the manufacturing activities in Redwood City are charged as incurred to the “Cost of product sales” of Data Systems. During 2006, 2005 and 2004, we paid and charged the restructuring accrual $0.6 million, $0.6 million and $1.1 million, respectively, related to costs associated with the vacated portion of the facilities. We have paid and charged the restructuring accrual $4.9 million since the inception of the 2002 restructuring program. The unamortized balance in accrued restructuring totaled $1.0 million at December 31, 2006. This obligation has been discounted to present value. We expect to make payments related to the remaining balance of accrued restructuring through 2008. We evaluate the amount of accrued restructuring costs, including projected sublet income, on a quarterly basis, and we may make additional adjustments in future periods if we determine that our actual obligations will differ significantly from remaining amounts accrued.

Operating Income (Loss). We reported an operating loss of $3.7 million in 2006 compared to operating income of $9.2 million in 2005 and operating income of $60.8 million in 2004.

See corporate selling and administrative expenses discussed above under “Selling and Administrative Expenses” for a discussion of the major components of Unallocated corporate loss.

Media Pension Costs . We remain the plan sponsor of the pension plan of Media, a former subsidiary that was sold to Quantegy Corporation (“Quantegy”) in 1995, and we remain obligated to make pension contributions to that plan. Pension costs (credits) are recognized under SFAS No. 87, “Employers’ Accounting for Pensions.” Payments made by Quantegy in prior years either as direct pension contributions or as reimbursement of amounts paid by Ampex on behalf of Media are recognized as an offset to actuarially computed pension costs.

Contributions and reimbursements paid by Quantegy totaled $0.8 million in 2004. There were no contributions or reimbursements paid by Quantegy in 2006 and 2005 and no additional reimbursements are expected as Quantegy filed for bankruptcy protection in January 2005.

Interest Expense. Interest expense increased to $3.0 million in 2006 compared to interest expense of $2.5 million in 2005, due to the issuance of additional Hillside Notes in the amount of $15.4 million after September 15, 2005. Interest expense levels in 2006 and 2005 were lower than interest expense of $9.7 million in 2004 due to repayments on senior debt of $62.4 million in the fourth quarter of 2004 and $10.4 million in the second quarter of 2005. We made cash payments of interest totaling $2.1 million, $2.9 million and $3.3 million in 2006, 2005 and 2004, respectively. Interest not paid in cash was capitalized and added to the principal amount of the related debt obligation.

Amortization of Debt Financing Costs. Financing costs associated with the original issuance of the 12% Senior Notes are being charged to expense through the maturity date in 2008. We included an additional amortization charge of $0.2 million in 2005 based on the significant redemption payments made against the 12% Senior Notes.

Interest Income. Interest income is earned on cash balances and short and long-term investments.

Other (Income) Expense, Net. In 2006, we realized $3.2 million of incentive fees, which were assigned to us by the managing member of an investment limited liability company (“LLC”) upon the sale of the LLC’s investment in Elementis. We credited these incentive fees against other (income) expense, net. See “Note 13—Related Party Transactions” of Notes to Consolidated Financial Statements. We do not expect to receive any additional incentive fees from these entities in 2007, which could negatively impact our results of operations. In addition, we realized a non-recurring gain of $0.3 million from the sale of other securities.

On April 15, 2005, Data Systems sold its former manufacturing facility and received net proceeds on the sale of approximately $3.1 million, resulting in a gain of $0.5 million which is included in other (income) expense, net.

Otherwise, other income (expense), net consists primarily of foreign currency translation gains and losses resulting from our foreign operations, which were not significant.

Provision for Income Taxes . The provision for income taxes in the years ended December 31, 2006, 2005 and 2004 included foreign and state income taxes and withholding taxes on royalty revenue. In 2005 and 2004, we were able to lower our tax provision by utilizing NOL carryforwards. At December 31, 2006, we had federal NOLs for income tax purposes of approximately $189.6 million, expiring in the years 2007 through 2024. In addition, we have federal capital loss carryforwards totaling $8.8 million at December 31, 2006, which may be utilized to offset capital gains, if any, generated in future periods. Accordingly, we have the ability to shelter a substantial amount of future federal taxable income, including future licensing revenue, if any is ultimately realized. The remaining provision for income taxes in 2006 and 2005 consisted primarily of foreign withholding taxes on royalty revenue generated in certain Far East locations.

Equity in Income of Limited Partnership, Including Sale of Investment. We made an investment in an investment limited partnership in 2003, which we accounted for under the equity method of accounting. During the year ended December 31, 2004, the partnership sold or distributed to its partners all of its remaining investments in a publicly held British promotional products company and we recognized our pro rata share of the gain on the sale of $1.7 million. We received total distributions from the general partner of $3.3 million on our $1 million investment, which included a reimbursement of business development expenses of $0.6 million credited against corporate selling and administrative expenses. See “Selling and Administrative Expenses” above and “Note 13—Related Party Transactions” of Notes to Consolidated Financial Statements. No further investment activities are envisioned by this partnership, which has wound up its affairs.

Income (Loss) from Discontinued Operations. For the year ended December 31, 2006, we recognized a loss from Discontinued Operations of $0.2 million compared to income from Discontinued Operations of $0.9 million for the year ended December 31, 2005 and a loss from Discontinued Operations of $2.1 million for the year ended December 31, 2004.

We disposed of our Media subsidiary in 1995. However, we have a continuing liability with respect to environmental matters pertaining to Media’s sites and activities. The measurement of our obligation and recognition of expense for environmental matters directly related to Media’s operations is accounted for under SFAS No. 5, “Accounting for Contingencies.” On January 10, 2005, Media filed under Chapter 11 of the Bankruptcy Code. Based on our assessment of Media’s financial condition and understanding of its environmental remediation obligations, we recorded an estimate of amounts probable of incurrence by us for future clean up costs of $2.5 million, all of which was provided in the fourth quarter of 2004.

In 2004, lease obligations that we guaranteed, of a former subsidiary that manufactured disk drives, expired. We recognized a gain on these discontinued operations of $0.3 million as a result of the favorable disposition of the lease.

In 2005, we recognized a gain on discontinued operations of $0.9 million on subletting facilities formerly occupied by our Internet video operations. In 2006, we increased the reserve by $0.2 million for the amount of net liabilities for discontinued operations to include additional expected costs associated with the sublet facility lease related to our former Internet video operations.

Net Income (Loss). We reported a net loss of $3.9 million in 2006 compared to net income of $6.7 million in 2005 and net income of $46.4 million in 2004, primarily as a result of the factors discussed above.

Other Comprehensive Income (Loss). In accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” we have recorded in “Accumulated other comprehensive income (loss)” non-cash charges (credits) of ($12.3) million in 2006, $21.8 million in 2005 and ($1.8) million in 2004, respectively, to adjust the additional minimum pension liability, which totaled $100.5 million, $112.8 million and $91.1 million at December 31, 2006, 2005 and 2004, respectively, representing the excess of projected benefit obligations over the fair value of plan assets. We terminated benefit service and compensation credit accruals under the pension plan in 1994 and since that date pension expense consisted of amortization of unrecognized pension losses over the expected remaining lives of the plans’ retirees. Our net pension obligation (liability) reflected in our Consolidated Balance Sheets under SFAS No. 87 was equal to the unfunded projected benefit obligation determined under SFAS No. 158; accordingly, the adoption of SFAS No. 158 had no impact on our Consolidated Balance Sheets or Statement of Operations and Comprehensive Income (Loss). Other comprehensive income (loss) also includes foreign currency transaction adjustments resulting from our foreign operations.

Inflation and Changing Prices. We do not believe that inflation or changing prices have had any material impact on our product and service revenue, licensing revenue or income from continuing operations for the years ended December 31, 2006, 2005 and 2004.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations for the Three and Nine Months Ended September 30, 2007 and 2006

Licensing Revenue. Licensing revenue was $2.7 million and $9.9 million in the three and nine months ended September 30, 2007 compared to $3.2 million and $7.4 million in the three and nine months ended September 30, 2006. Licensing revenue is derived from royalties that we receive from licensing our patents.

Running royalties are based on quarterly sales by the licensees reported to the Company within 60 days after the end of the respective quarter. We earned running royalties of $8.0 million in the nine months ended September 30, 2007, substantially all of which was earned from manufacturers of digital camcorders. We earned running royalties of $4.6 million from manufacturers of digital camcorders and $2.8 million from manufacturers of digital still cameras and other products in the nine months ended September 30, 2006. The increase in running royalties on camcorders in 2007 results from royalties paid by Sony Corporation (“Sony”) on their digital camcorder sales subject to an agreement which commenced on April 12, 2006. This offset the decline in digital still camera running royalties due to the expiration of the “121” patent on April 11, 2006. The increase in total licensing revenue resulted largely from the recognition in the first quarter of 2007 of a non-recurring lump sum royalty prepayment with a manufacturer of camcorders that covers the manufacturer’s obligation to pay royalties on product shipments through August 2011. There were no one-time royalty settlements or prepayments in the nine months ended September 30, 2006. Due to one-time royalty settlements covering prior and future periods, the expiration of certain patents and the terms and periods covered by licensing agreements, licensing revenues are not comparable between the periods presented and are not indicative of licensing revenues to be received in future periods.

During 2007 we have met with a number of firms and individuals that believe they can assist us to monetize our intellectual property. Certain of these firms provide the financial, technical and legal resources necessary to bring litigation against manufacturers of consumer and industrial products that are believed to infringe our intellectual property in exchange for a share of future licensing revenues or legal settlement awards. Others believe that they can persuade manufacturers that their licensing revenues will be enhanced by combining their existing patent portfolio with certain Ampex patents and the parties would share the expanded licensing revenue stream – a “non-litigation” approach to patent monetization. We recently have engaged Commercial Strategy, LLC to assist us in identifying companies with whom we might partner, to enhance our licensing program. The M-CAM, Inc. agreement will expire in January 2008, in accordance with its terms.

Over the next several months, we intend to identify specific licensing strategies for our major patent/product groups. For example, we may seek to partner with existing companies that broadly license patents to manufacturers of cellular telephones, digital still cameras and certain industrial products that may utilize our proprietary technology for a share of expanded future licensing revenues. Compensation of external advisors who assist us in identifying and/or implementing these strategies may include a share of future licensing revenues resulting from their efforts. Our ability to pursue new patent monetization initiatives will be dependent upon successfully restructuring our indebtedness, of which there can be no assurance.

Our relevant digital imaging patents were developed when we manufactured still stores, video special effects products and digital videotape recorders, which we sold into the professional broadcast and postproduction markets in prior years. As discussed above, these patents have expiration dates through 2014. After they expire, our future licensing revenues are expected to decline materially.

Product Revenue. Product revenue generated by our Recorders segment increased to $4.9 million and $14.7 million in the three and nine months ended September 30, 2007 from $3.2 million and $10.9 million in the three and nine months ended September 30, 2006. Government agencies and defense contractors and commercial airframe manufacturers are currently our principal customers for the Recorders segment. Government agencies and defense contractors have historically experienced significant pressure to reduce spending and we expect them to experience such pressure in the future, which may lead to sales declines. In 2004, we introduced our DDRs and DSRs instrumentation recorders, which are disk-based and solid state memory-based data acquisition recorders used in intelligence gathering activities and airframe flight certification. Revenues in the nine months ended September 30, 2007 from these new data acquisition recorders increased to $10.0 million from $4.8 million in the nine months ended September 30, 2006. These products are intended to replace, over several years, a large installed base of our DCRsi tape-based data acquisition recorders. These new products could lead to a further increase of product revenues over current levels. While we have recently been awarded significant multi-year contracts for our disk- and solid state-based instrumentation recorders, there can be no assurance that these new products will attain the same level of market penetration that our earlier products achieved.

Our backlog of firm orders was $4.0 million at September 30, 2007 compared to $5.9 million at December 31, 2006. The decline in backlog results from completing a multi-year contract with The Boeing Company (“Boeing”) for our new disk- and solid state-based data instrumentation recorders used in the development of the 787 airplane. We have received orders from Boeing and the U.S. Navy, totaling $9.0 million, which are not included in backlog at September 30, 2007 as they contain cancellation clauses or require receipt of purchase orders against the contract. We have shipped $2.0 million against these orders. We typically operate with low levels of backlog, requiring us to obtain the majority of each period’s orders in the same period that they must be shipped to the customer. Historically, a small number of large orders have significantly impacted sales levels and often orders are received late in the quarter, making it difficult to predict revenue levels in future periods.

Service Revenue. Total service revenue generated by our Recorders segment in the three and nine months ended September 30, 2007 was $1.8 million and $5.4 million compared to $2.2 million and $6.3 million for the three and nine months ended September 30, 2006. We expect that service revenue will decline over time as older tape-based products, sales of which were accompanied by service contracts generating service revenue, are replaced with non-service revenue generating disk- or solid state memory-based instrumentation recorders

Intellectual Property Costs. Intellectual property costs include external legal costs as well as certain internal costs, described below, pertaining to the enforcement of our patents. Intellectual property costs also include external legal costs incurred in investigating the validity and enforceability of our patents and auditing royalty reports. Intellectual property costs fluctuate widely between periods based primarily on whether or not we are pursuing patent litigation. During the nine months ended September 30, 2007 and 2006, we incurred external legal costs in the amount of $0.5 million and $6.8 million, respectively, in connection with our suit against Kodak. Because our suit against Kodak is on appeal, our external litigation costs during 2007 are expected to remain significantly below 2006 amounts.

There is no direct cost of goods sold associated with licensing revenue . We have an internal staff of lawyers and engineers, and employ outside contractors who are principally involved in negotiating and monitoring our licensing agreements. Their compensation, travel expenditures and other direct costs are included as intellectual property costs. We do not allocate any general corporate overhead to our Licensing segment. Compensation includes incentive payments under long-term incentive plans earned by our employees based on amounts collected from our licensees. We also expect to incur additional costs in future years investigating and analyzing whether manufacturers of consumer digital imaging products are utilizing our other digital imaging and data compression technologies as well as to support new patent monetization strategies. There can be no assurance that any of the patent monetization opportunities that we may pursue will result in increased licensing revenues.

Cost of Product Revenue. Cost of product sales includes the cost of materials, labor and overhead incurred in the manufacture of our products. Cost of product sales as a percentage of product revenue was 48.7% and 49.1% in the three and nine months ended September 30, 2007 compared to 60.6% and 53.9% in the three and nine months ended September 30, 2006. Our cost of product sales percentage fluctuates based on a number of factors, including the volume and mix of product shipped in the period. The decrease in the cost of product revenue percentage in 2007 when compared to 2006 was due to the increased sales volume in 2007, which resulted in greater absorption of fixed manufacturing costs. During the nine months ended September 30, 2006, we reduced our retrofit reserve associated with product sold in a prior period by $0.2 million based on the acknowledgement by the customer that no further liability exists.

Cost of Service Revenue. Cost of service revenue includes materials and labor used in maintaining and repairing our customers’ systems that we provide under service contracts. Cost of service revenue as a percentage of service revenue was 28.7% and 28.7% in the three and nine months ended September 30, 2007 compared to 26.9% and 28.2% in the three and nine months ended September 30, 2006. The cost of service revenue fluctuates based largely on the level of services we provide to repair or replace equipment in a particular period and the cost of material used to repair or replace such equipment.

Research, Development and Engineering Expenses. All of our research, development and engineering expenses relate to our Recorders segment. The increase in research, development and engineering expenditures during the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006 is due primarily to an increase in engineering personnel coupled with costs incurred to produce peripheral products to enhance the DDRs ruggedized disk- and DSRs solid state memory-based data acquisition recorders. Such costs are expected to continue to increase as we develop new and enhanced products.

Selling and Administrative Expenses. Selling and administrative expenses increased to $3.9 million in the three months ended September 30, 2007 from $3.2 million in the three months ended September 30, 2006 and increased to $11.2 million in the nine months ended September 30, 2007 from $9.4 million in the nine months ended September 30, 2006.

Selling and administrative expenses for the Recorders segment increased in the three and nine months ended September 30, 2007 compared to the three and nine months period ended September 30, 2006 largely as a result of additional sales and marketing expenses incurred for shows, advertising and travel.

Corporate expenses during the 2007 periods included legal costs incurred in connection with Hillside Note restructuring issues totaling $0.4 million. We expect to incur additional legal costs to document any debt restructuring or plan of reorganization that we and our lenders ultimately negotiate.

Corporate selling and administrative expenses during 2006 included business development expenses including consulting fees and office rent paid to a British investment advisory company, totaled $0.3 million in the nine months ended September 30, 2006. We discontinued payments to the investment advisory company on April 1, 2006. In the nine months ended September 30, 2006, we received reimbursement of $1.5 million of business development expenses incurred from 2004 to 2006 when an investment was sold. See “Note 16 – Related Party Transactions” of the Notes to Unaudited Consolidated Financial Statements.

Beginning in 2006, we began to expense the fair value of stock options and restricted stock awards over the period such options and awards vest. We expensed $0.3 million and $0.3 million in the nine months ended September 30, 2007 and 2006, respectively.

Operating Income (Loss). We reported operating income of $0.6 million and $4.2 million in the three and nine months ended September 30, 2007, respectively, compared to operating income of $23 thousand for the three months ended September 30, 2006 and an operating loss of $4.0 million for the nine months ended September 30, 2006.

See corporate selling and administrative expenses discussed above under “Selling and Administrative Expenses” for a discussion of the major components of Unallocated corporate loss.

Media Pension Costs . We remain the plan sponsor of the pension plan of Media, a former subsidiary that was sold to Quantegy Corporation (“Quantegy”) in 1995, and we remain obligated to make pension contributions to that plan. Pension costs (credits) are recognized under SFAS No. 87, “Employers’ Accounting for Pensions.”

Interest Expense. Interest expense increased to $1.2 million and $3.1 million in the three and nine months ended September 30, 2007 compared to $0.8 million and $2.1 million in the three and nine months ended September 30, 2006 due to the issuance of additional Hillside Notes in the amount of $19.1 million over the twelve month period ended September 30, 2007. We made cash payments of interest totaling $1.2 million and $2.6 million in the three and nine months ended September 30, 2007 compared to interest totaling $0.5 million and $1.4 million in the three and nine months ended September 30, 2006. Interest of $0.4 million and $0.5 million not paid in cash in the nine months ended September 30, 2007 and 2006, respectively, was capitalized and added to the principal amount of the related debt obligation.

Amortization of Debt Financing Costs. Financing costs associated with the original issuance of the 12% Senior Notes are being charged to expense through the maturity date in 2008.

Interest Income. Interest income is earned on cash balances and short-term investments.

Other (Income) Expense, Net. In the three and nine months ended September 30, 2007, we realized $0.1 million on the collection of a prior period cost plus program with a government subcontractor. In the three and nine months ended September 30, 2006, we realized $2.4 million and $3.2 million, respectively, of incentive fees, which were assigned to us by the managing member of an investment limited liability company (“LLC”) upon the sale of the LLC’s investment in a British specialty chemical company. We credited these incentive fees against other (income) expense, net. See “Note 16 – Related Party Transactions” of Notes to Unaudited Consolidated Financial Statements. We do not expect to receive any additional incentive fees from these entities. In the three and nine months ended September 30, 2006, we realized a non-recurring gain of $0.3 million from the sale of other securities.

Other income (expense), net, also includes foreign currency translation gains and losses resulting from our foreign operations, which were not significant.

Provision for Income Taxes . The provision for income taxes in the three and nine months ended September 30, 2007 and 2006 included foreign and state income taxes and withholding taxes on royalty revenue generated in certain Far East locations. At December 31, 2006, we had federal NOLs for income tax purposes of approximately $189.6 million, expiring in the years 2007 through 2024. In addition, we have federal capital loss carryforwards totaling $8.8 million at December 31, 2006, which may be utilized to offset capital gains, if any, generated in future periods. Accordingly, we have the ability to shelter a substantial amount of future federal taxable income, including future licensing revenue, if any is ultimately realized.

Loss from Discontinued Operations. In the three and nine months ended September 30, 2007, we increased the reserve by $0.1 million for the amount of net liabilities for discontinued operations to include additional expected costs associated with a facility lease related to our former Internet video operations. In the nine months ended September 30, 2006, we increased the reserve by $0.2 million for the amount of net liabilities for discontinued operations. See Note 10 of Notes to Unaudited Consolidated Financial Statements.

Net Income (Loss). We reported a net loss of $0.5 million and net income of $1.8 million in the three months ended September 30, 2007 and September 30, 2006, respectively, and net income of $1.2 million and a net loss of $3.2 million in the nine months ended September 30, 2007 and September 30, 2006 respectively, primarily as a result of the factors discussed above.

Other Comprehensive Income (Loss). Other comprehensive income (loss) includes foreign currency transaction adjustments resulting from our foreign operations.

Inflation and Changing Prices. We do not believe that inflation or changing prices have had any material impact on our product and service revenue, licensing revenue or income from continuing operations for the periods ended

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