Forward-Looking Statements

Any forward looking statements made herein are based on current expectations of the Company that involve a number of risks and uncertainties and should not be considered as guarantees of future performance. These statements are made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements may be identified by the use of words such as "expect," "anticipate," "believe," "intend," "plans," "predict," or "will". Although the Company believes that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Many factors could cause actual results to differ materially from our forward looking statements. Several of these factors include, without limitation: our ability to maintain our current pricing model and/or decrease our cost of sales; continued availability of supplies or materials used in manufacturing at competitive prices; volatility in commodity and energy prices and our ability to offset higher costs with price increases; the costs inherent with complying with new statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002; variability of customer delivery requirements; our ability to efficiently integrate future acquisitions and other new lines of business that the Company may enter in the future, if any; and other risks referenced from time to time elsewhere in this report and in our filings with the SEC.

The Company is under no obligation and does not intend to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events. 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, 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 electrodes. 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, tooling, 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 was $5,371,439 for the three months ended June 30, 2009 as compared to $6,426,120 for the same period in 2008, a decrease of 16% or $1,054,681. Revenues associated with the discontinued unprofitable forging product totaled $1,025,836 in the three months ended June 30, 2008. Sales of Micron's medical sensors and snaps with silver surcharge decreased by $440,695, while the volume increased by 7%. Management will continue to focus on the protection and growth of sensor market share. Other miscellaneous sales increased by $41,274. Revenue from the Micron Integrated Technology's (MIT) other product life cycle management programs increased $370,576. The MIT division in Micron Products includes the custom manufacturing and product life cycle businesses. This division's revenue is derived from the custom molding, precision metal machining and mold making activities.

Revenue was $10,054,893 for the six months ended June 30, 2009 as compared to $11,885,862 for the same period in 2008, a decrease of 15% or $1,830,969. The revenue decrease associated with the discontinued unprofitable forging product totaled $1,477,981 in the six months ended June 30, 2009 as compared to the same period in 2008. During this same period, sales of Micron's medical sensors and snaps with silver surcharge decreased by $662,059, while the volume increased by 14%. High volume precision molded products and other miscellaneous sales decreased by $7,687. Revenue from the Micron Integrated Technology's (MIT) product life cycle management programs excluding the forging product increased by $365,901. The snap attaching machine business unit decreased $49,143 when compared to the same period in 2008. There were no sales of the Company's SAECG products in the first six months of 2009 or 2008.

Revenue from domestic and foreign sales for the first six months is as follows:

                            Three Months Ending June 30,                           Six Months Ending June 30,
                     2009            %         2008            %           2009            %          2008            %
United States     $ 3,505,679        65     $ 3,872,638        60      $  6,121,668        61     $  6,939,389        58
Canada                873,421        16       1,322,181        21         1,820,099        18        2,663,196        22
Europe                571,091        11         919,573        14         1,372,637        14        1,713,181        15
Pacific Rim           176,045         3         136,709         2           327,475         3          236,362         2
Other                 245,203         5         175,019         3           413,014         4          333,734         3
Total             $ 5,371,439       100     $ 6,426,120       100      $ 10,054,893       100     $ 11,885,862       100

The decrease in domestic sales was largely a result of the MIT division's elimination of an unprofitable forging product. Canadian sales decrease is the result of price concessions and a decrease in silver surcharge collected for Micron's electrophysiological sensor product lines.

Cost of sales was $4,496,306 or 83.7% for the three months ended June 30, 2009 as compared to $5,079,649 or 79% for the same period in 2009. Cost of sales was $8,235,447 or 81.9% for the six months ended June 30, 2009 as compared to $9,427,953 or 79.3% for the same period in 2008. Cost of manufacturing has been stabilized with the recent success of a company-wide cost reduction team. The reduction and stabilization of costs remains a priority of management efforts. The inability to increase our sensor prices in the competitive global marketplace hinders passing additional material and utility cost increases to our customers, excluding the escalating cost of silver. Management continues to investigate ways to improve the overall gross margin by elimination of low contribution products while expanding higher margin product lines. The investment in automated equipment is ongoing with the full benefit expected to begin the fourth quarter of 2009.

Selling and marketing expense was $183,729 or 3.5% of sales in the three months ended June 30, 2009 as compared to $224,654 or 3.5% for the same period in 2008. Selling and marketing expense was $334,180 or 3.3% of sales for the six months ended June 30, 2009 as compared to $415,028 or 3.5% of sales for the same period in 2008 a decrease of 19.5%. Selling expenses continue to be stable as a percentage of sales. The decrease in selling expenses reflects a decrease in personnel and travel costs. Selling expenses as a percentage of sales has been and is expected to remain stable in 2009.

General and administrative expense was $512,391 or 9.6% of sales for the three months ended June 30, 2009 as compared to $779,084 or 12% of sales for the same period in 2008. General and administrative expense was $1,087,895 or 10.8% of sales for the six months ended June 30, 2009 as compared to $1,395,948 or 11.7% of sales for the same period in 2008. Included in the expense for the three months ended June 30, 2008 was a one time charge of $250,000 for costs associated with a terminated acquisition following due diligence. The 2009 general and administrative expense is expected to increase as the Section 404 of the Sarbanes-Oxley Act of 2002 compliance project is completed this year.

Research and development expense was $57,716 or 1.1% of sales for the three months ended June 30, 2009 as compared to $129,051 or 2.0% of sales for the same period in 2008. Research and development expense was $126,463 or 1.3% of sales for the six months ended June 30, 2009 as compared to $212,673 or 1.8% of sales in the same period in 2008. The proportion of expense related to ART's product, Predictor®7 was $7,393 and $11,649 for the three and six months ended June 30, 2009, compared to $19,320 and $40,041 for the same periods in 2008. Although base development work on Predictor 7 has been completed, costs were expended to support 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 process improvements to Micron sensor and snap product line and new processes in MIT. This work is expected to continue through the end of 2009.

Other expense, net was $5,377 for the three months ended June 30, 2009 as compared to $5,563 for the same period in 2008. Other expense, net was $19,210 for the six months ended June 30, 2009 as compared to $769 for the same period in 2008. Interest income in the six months ended June 30, 2009 was offset by a loss on disposal of assets of $8,904 and interest expense of $20,334 associated with an equipment note as compared to $23,772 interest expense in 2008.

Income taxes as a percent of income before income taxes were 37% for the six months ended June 30, 2009 as compared to 35% for the same period in 2008. This difference was the result of tax credits earned in 2008. Management will continue to seek to implement any tax planning opportunities that could effectively reduce the Company's income tax obligations in the future.

Liquidity and Capital Resources

Working capital was $7,701,339 at June 30, 2009 compared to $7,440,721 at December 31, 2008, an increase of $260,618. The increase resulted from the operational cash flows exceeding our capital investment, reduction of debt and stock repurchase program. Capital investment will 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. Capital investment in automation equipment is expected to reduce working capital over the next 6 months of 2009.

Net capital expenditures were $634,572 for the first six months of 2009 as compared to $264,743 for the same period in 2008. The largest portion of the capital expenditures in the first six months of 2009 resulted from adding automation equipment to our sensor product line. Some of the expenditures were in the form of deposits on production equipment to be installed in the third quarter. At least an additional $400,000 will be invested in this automation project before the end of 2009. Included in the capital expenditures for the same period in 2008 was the continued installation of the Enterprise Resource Planning software, including shop floor bar code acquisition devices, as well as upgrades to and replacement of existing machinery and tooling. Capital expenditures for the six months ended June 30, 2009 were made with cash from operations.

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, 2009 or December 31, 2008. The Company has a one year term note secured by equipment with a balance at December 31, 2008 of $638,091. In the third quarter of 2008, the equipment note was extended for one year with a decrease in the fixed rate from 6.75% to 6.5% per annum. The equipment note is amortized over 6 years with a balloon payment for the remaining balance at September 15, 2009. The acquisition note related to the acquisition of Leominster Tool in December of 2006 was paid in full in March 2008.

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

In October 2008, the Company's Board of Directors authorized the repurchase in the open market from time to time of up to $650,000 of the Company's outstanding stock. An aggregate of 23,389 shares were purchased in the fourth quarter of 2008 under the program for an aggregate of $53,975. An additional aggregate purchase of 12,810 shares was made in the second quarter of 2009 under the program for $33,188.

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.

Stock-Based Compensation

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 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 income.

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. As of June 30, 2009, no impairment of goodwill was required.

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.