Forward-Looking Statements

Any forward-looking statements made herein are based on current expectations of the Company, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include: interruptions or cancellation of existing contracts, inability to integrate acquisitions, impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development and commercialization risks, and changing economic conditions in developing countries and an inability to arrange additional debt or equity financing. More information about factors that potentially could affect the Company's financial results is included in the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 31, 2008.

Overview

Arrhythmia Research Technology, Inc. ("ART") is engaged in the licensing of medical software, which acquires data and analyzes electrical impulses of the heart to detect and aid in the treatment of potentially lethal arrhythmias. Micron Products, Inc. ("Micron"), a wholly owned subsidiary, is the primary source of consolidated revenues. Micron manufactures disposable electrode sensors used as a component part in the manufacture of integrated disposable electro-physiological sensors. These disposable medical devices are used world wide in the monitoring of electric signals in various medical applications. Micron has expanded into custom plastic injection molded products and product life cycle management. Revenues in this sector are primarily custom injection molding, and end-to-end product life cycle management through a comprehensive portfolio of value-added services such as design, engineering, prototyping, manufacturing, machining, assembly and packaging.

Results of Operations

Revenue for the three months ended June 30, 2008 was $6,426,120 versus $5,400,218 for the three months ended June 30, 2007, an increase of 19%. Sales of sensors and snaps with silver surcharge decreased by $142,000 and high volume precision molded products and other miscellaneous sales increased by $50,000. The decrease in revenue of sensors, snaps and high precision molded product sales was due, in part, to the periodic fluctuations in customer production schedules. Revenue from NEM's custom molded products and MIT's product life cycle management programs increased $708,500 as a direct result of the growing metal related business. This includes the precision medical machining, and the sale of imported forgings for a new large customer. The Leominster Tool division's contribution increased by $410,000 in revenues and does not include orthopedic implant production and tools produced for customers of the other divisions. Engineering and tooling revenue included above increased by $72,900 as compared to the same period in 2007. Engineering and tooling revenues typically occur at the beginning of a product life cycle or when a customer changes its manufacturing source. After the design and manufacture of the prototype and/or production tooling, the Company should benefit from product sales as it begins to utilize the customer owned tooling.

Revenue for the six months ended June 30, 2008 was $11,885,862 versus $10,409,494 for the six months ended June 30, 2007, an increase of 14%. Sales of sensors and snaps with silver surcharge decreased by $180,000 and high volume precision molded products and other miscellaneous sales increased by $39,000. The decrease in sensors, snaps and high precision molded product sales was due, in part, to the periodic fluctuations in customer production schedules. Revenue from NEM's custom molded products and MIT's product life cycle management programs increased $1,237,000 as a direct result of the growing metal related business. This includes the medical machining, and the importation of forgings for a new large customer. The Leominster Tool division's contribution increased by $380,600 in revenues and does not include orthopedic implant production and tools produced for customers of the other divisions. Engineering and tooling revenue included above increased by $234,000 as compared to the same period in 2007. Engineering and tooling revenues typically occur at the beginning of a product life cycle or when a customer changes its manufacturing source. After the design and manufacture of the prototype and/or production tooling, the Company should benefit from product sales as it begins to utilize the customer owned tooling. There were no sales of the Company's SAECG products in the first six months of 2008 or 2007.

Revenue from domestic and foreign sales is as follows:

                          Three Months Ending June 30,                           Six Months Ending June 30,
                    2008           %          2007           %            2008           %           2007           %
United States   $ 3,872,638        60     $ 2,938,406        54      $  6,939,389        58     $  5,705,028        55
Canada            1,322,181        21       1,608,305        30         2,663,196        22        2,911,075        28
Europe              919,573        14         640,360        12         1,713,181        15        1,378,043        13
Pacific Rim         136,709         2         111,450         2           236,362         2          205,250         2
Other               175,019         3         101,697         2           333,734         3          210,098         2
Total           $ 6,426,120       100     $ 5,400,218       100      $ 11,885,862       100     $ 10,409,494       100

The significant increase in domestic sales was a result of the MIT division's sales. Canadian sales decreases can be attributed to a decrease in volume as well as price reductions in Micron's electrophysiological sensor and snap product lines, while increased volume in the same product lines resulted in higher European revenues. These sales are affected by the corresponding reduction or increase in silver surcharge collected.

Cost of sales was $5,079,649 or 79.0% of revenue and $4,131,193 or 76.5% of revenue for the three months ended June 30, 2008 and 2007, respectively. Cost of sales was $9,427,953 or 79.3% for the six months ended June 30, 2008 as compared to $8,077,540 or 77.6% for the same period in 2007. The stabilization of material costs continues to be a major focus of management efforts; however variations in customer demand at the NEM and MIT divisions for lower gross profit products can impact cost of sales percentage period to period. Although management has been successful in stabilizing a portion of the electricity costs by negotiating a long-term purchase agreement, other manufacturing costs continue to rise. The inability to increase our sensor prices in the competitive global marketplace hinders passing material cost increases to our customers, excluding the escalating cost of silver. Some synergistic benefits will be realized by year end as the Leominster Tool division is fully integrated into the Fitchburg complex. Management continues to investigate strategies to both stabilize and improve the overall gross margin without sacrificing product quality and to expand higher margin product lines.

Selling and marketing expense was $224,654 or 3.5% of revenue and $177,791 or 3.3% of revenue for the three months ended June 30, 2008 and 2007, respectively. Selling and marketing expense was $415,028 or 3.5% for the six months ended June 30, 2008 as compared to $361,464 or 3.5% for the same period in 2007. Selling expenses are expected to be stable as a percentage of sales. The selling expense increased with additional personnel and travel expenses.

General and administrative expense was $779,084 or 12.1% of revenue and $550,617 or 10.2% of revenue for the three months ended June 30, 2008 and 2007, respectively. General and administrative expense was $1,395,948 or 11.7% for the six months ended June 30, 2008 as compared to $1,055,911 or 10.1% for the same period in 2007. Included in the increase of expense for the three months ended June 30, 2008 is a one time charge of $250,000 for costs associated with a terminated acquisition following due diligence. In the six months ended June 30, 2008, the cost of additional administrative personnel and technology upgrades in preparation for Section 404 of the Sarbanes-Oxley Act of 2002 compliance increased the expense when compared to a similar period in 2007. Although the delay by the SEC for outside auditor attestation requirements of Section 404 will limit a previously expected increase in audit fees for the end of 2008, the costs associated with internal control documentation with outside consultants began in the first quarter, and continues as planned. The Company expects the new enterprise resource planning solution to improve data collection and reporting in all aspects of the business.

Research and development expense was $129,051 or 2% of revenue and $16,525 or 0.3% of revenue for the three months ended June 30, 2008 and 2007, respectively. Research and development expense was $212,673 or 1.8% for the six months ended June 30, 2008 as compared to $30,377 or 0.3% for the same period in 2007. The three months ended June 30, 2008 included $52,000 of expense for equipment tested in a process improvement project with the sensor product line as well as the impairment of equipment used for final product testing. Other costs are related to ART's product, Predictor®7. Although base development work on Predictor 7 has been completed, expenses continue with technical support of a National Institute of Health research project utilizing ART's proprietary Signal Averaged ECG products and patented algorithms. The remaining portion of the research and development expense is associated with continued work on patentable technologies on the Micron sensor and snap product line. This work is expected to continue through the end of 2008.

Other income (expense), net was $5,563 in expense versus income of $308 for the three months ended June 30, 2008 and 2007, respectively. Other expense was $769 and $10,022 for the six months ended June 30, 2008 and 2007, respectively. Interest income in the six months ended June 30, 2008 was offset by interest expense of $23,772 associated with an acquisition and equipment notes. The income in the same period in 2007 was the result of interest income on cash balances.

Income taxes as a percent of income before income taxes were 36% and 35% for the three and six months ended June 30, 2008, and 15% and 22% for the three and six months ended June 30, 2007. The differences in effective tax rate are a result of the timing of tax credits earned. Management will continue to seek to implement any tax planning opportunities that could effectively reduce the Company's income tax provision in the future.

Basic earnings per share decreased to $0.05 from $0.16 for the three months ended June 30, 2008 and 2007, respectively, and decreased to $0.10 from $0.25 for the six months ended June 30, 2008 and 2007, respectively. The decrease in the current interim period includes a non-recurring charge of $302,000, related to the acquisition and research and development activities. This charge, net of tax, decreased basic earnings per share by $0.07.

Liquidity and Capital Resources

Working capital was $7,353,434 at June 30, 2008 compared to $6,563,047 at December 31, 2007, an increase of $790,387. The increase in working capital is the result of an increase in operating cash flow. Operating cash flow is expected to continue to increase faster than planned capital expenditure for the next six months. Capital investment could decrease working capital with any significant investment resulting from future acquisition of assets or businesses, significant expansion of production capacity, a medical study, or further software development.

Net capital expenditures were $264,743 for the six months of 2008 as compared to $1,065,283 for the same period in 2007. The capital expenditures during the first six months of 2008 and 2007 were for the acquisition of additional production machinery and equipment, including upgrades in and replacement of existing machinery and tooling. Included in the capital expenditures for 2007 is the acquisition of an adjacent property to the Company's Fitchburg complex and technology upgrades for a new enterprise resource planning solution.

The Company has an unsecured $1,000,000 credit line with a large multinational bank. No funds have been drawn down on the line as of June 30, 2008 or December 31, 2007. In September 2007, a one year note for $813,000 at the fixed rate of 6.75% per annum for metal machining equipment was drawn down by $383,000. A second payment of $383,000 was made in January of 2008 for this equipment. The equipment note is amortized over seven years with a balloon payment at September 30, 2008.

The Company expects to meet cash demands for its operations at current levels with current operating cash flows for the foreseeable future.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles requires management to make judgments, assumptions and estimates that affect the amounts reported. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of the Company's financial statements and requires management to make difficult, subjective, and complex judgments that could have a material effect on the Company's financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) the Company is required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates the Company could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on the Company's financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. The Company bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable in the circumstances. These estimates may change as new events occur, as additional information is obtained and as the Company's operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in the section above entitled "Forward-looking Statements." Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that the Company's consolidated financial statements are fairly stated in accordance with generally accepted accounting principles, and present a meaningful presentation of the Company's financial condition and results of operations.

Management believes that the following are critical accounting policies:

Revenue Recognition and Accounts Receivable

Revenues from the sale of products are recorded when the product is shipped, title and risk of loss have transferred to the purchaser, payment terms are fixed or determinable and payment is reasonably assured.

The financing of customer purchased tooling utilizes the direct financing method of revenue recognition. This requires the gain on the sale of the tooling to be recorded at the time the tool is put into service while the expected payments are reflected as a lease receivable.

Based on management's on-going analysis of accounts receivable balances, and after the initial recognition of the revenue, if an event occurs which may adversely affect the ultimate collectability of the related receivable, management will record an allowance for the bad debt. Bad debts have not had a significant impact on the Company's financial condition, results of operations, or cash flows.

The Company accounts for share based compensation under SFAS No. 123R, "Share Based Payment" ("FAS 123R"). FAS 123R requires that companies recognize and measure compensation expense for all share-based payments at the grant date based on the fair market value of the award. This share-based compensation expense must be included in the Company's statement of operations over the requisite service period.

The Company uses the Black-Scholes option pricing model which requires extensive use of financial estimates and accounting judgment, including the expected volatility of the Company's common stock over the estimated term, and estimates on the expected time period that employees will retain their vested options prior to exercising them. The number of shares that are expected to be forfeited before the options are vested are included in the calculation of compensation expense. The use of alternative assumptions could produce significantly different estimates of the fair value of the stock-based compensation and as a result, provide significantly different amounts recognized in the Company's statement of operations.

Inventory and Inventory Reserves

The Company values its inventory at the lower of cost or market. The Company reviews its inventory for quantities in excess of production requirements, obsolescence and for compliance with internal quality specifications. Any adjustments to inventory would be equal to the difference between the cost of inventory and the estimated net market value based upon assumptions about future demand, market conditions and expected cost to distribute those products to market. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required.

The Company maintains a reserve for excess, slow moving, and obsolete inventory as well as inventory with a carrying value in excess of its net realizable value. A review of inventory on hand is made at least annually and a provision for excess, slow moving, and obsolete inventory is recorded, if necessary. The review is based on several factors including a current assessment of future product demand, historical experience, and product expiration.

Deferred Tax Assets

The Company assesses its deferred tax assets based upon a more likely than not to be realized criteria. The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In accordance with FIN 48 we recognize the benefits of a tax position if that position is more likely than not to be sustained on audit, based on the technical merit of the position.

Asset Impairment - Goodwill

The Company reviews the valuation of goodwill and intangible assets to assess potential impairments on an annual basis. The management evaluates the carrying value of goodwill and other intangible assets in accordance with the guidelines set forth in SFAS 142. The value assigned to intangible assets is determined by a valuation based on estimates and judgment regarding expectations for the success and life cycle of products and businesses acquired. To test for impairment, present values of an estimate of future discounted cash flows related to the intangible assets are calculated compared to the value of the intangible asset. When impairment exists it could have a material adverse effect on the Company's business, financial condition and results of operations. There was no impairment as of June 30, 2008.

Asset Impairment - Long Lived Assets

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. When it is determined that the carrying value of such assets may not be recoverable, the Company generally measures any impairment based on projected undiscounted future cash flows attributed to the asset and its carrying value. If the carrying value exceeds the future discounted cash flows, asset impairment would be recorded. In the three months ended June 30, 2008, a long lived asset used in research and development was impaired for $22,378.