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; our ability to increase sales of higher margin products and services; variations in the mix of products and services sold; variability of customer delivery requirements; ability to license our software, provide timely customization and updates; ability to successfully market WirelessDx services, manage the timing of investment in operational infrastructure and ability to accelerate the pace of revenues from customer implementation; a stable interest rate market and/or a stable currency rate environment in the world, and specifically the countries where we are doing business; continued availability of supplies or materials used in manufacturing at competitive prices; volatility in commodity and energy prices; the Company's ability to offset higher costs with price increases; adverse regulatory developments in the U.S. or any other country the Company plans to do business in; entrance of competitive products and services in the Company's markets; the ability of management to execute plans and motivate personnel in the execution of those plans; no adverse publicity related to the Company and/or its products; adverse claims relating to the Company's intellectual property; adoption of new, or changes in, accounting principles; passage of new, or changes in, regulations; legal proceedings; ability to maintain compliance with the NYSE Amex requirements for continued listing of our common stock; the costs inherent with complying with statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002; the Company's ability to efficiently integrate 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 SEC, including its Annual Report on Form 10-K for the year ended December 31, 2011.

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 aid in the detection of potentially lethal arrhythmias. Micron Products, Inc. ("Micron"), a wholly-owned subsidiary, is the primary source of consolidated revenues. This primary source of revenue relates to the manufacturing of components, devices and equipment primarily for the medical and defense industries. The single largest category of revenue relates to Micron's production and sale of silver/silver chloride coated and conductive resin sensors used as component parts in the manufacture of integrated disposable electrophysiological sensors. These disposable medical devices are used worldwide in the monitoring of electrical signals in various medical applications. In an effort to leverage these skills, the Company has expanded into custom thermoplastic injection molded products with a full array of design, engineering and production services and management. With the addition of a medical machining cell, the Company began production of patient specific metal and plastic orthopedic devices. RMDDxUSA Corp. together with its subsidiary RMDDx Corporation (such subsidiaries collectively, "WirelessDx"), a wholly-owned subsidiary of ART, provides medical software and services, respectively, to the medical industry. While not currently adding significant revenue to the results, management believes these businesses have potential for future growth of the Company. Management continues to identify complementary and/or synergistic products, technologies and lines of business in an effort to broaden the Company's offerings.

Results of Operations
Revenue
The Company's consolidated net sales for the three months ended March 31, 2012 were $6,305,182, an increase of $122,117 or 1.98%, when compared to the total net sales of $6,183,065 in the three months ended March 31, 2011 as discussed by segment below.
Micron sales for the three months ended March 31, 2012 were $6,216,140, an increase of $46,652 or 0.8%, when compared to sales of $6,169,488 in the same period in 2011. Micron continues to experience price pressure in a competitive global market. The revenue associated with the sensor business, including silver surcharge, increased as a result of increased volume. This increase in sensor revenue was offset by the expected decrease in MIT division's custom manufacturing in defense industry revenue.
WirelessDx net sales were $89,042 for the three months ended March 31, 2012 compared to the net sales of $13,577 in the same period in 2011. The medical monitoring segment continued its expansion efforts after receiving a contract with the Veterans Administration and being issued a provider number as an IDTF during 2011.
ART's net sales were $0 for the three months ended March 31, 2012 and 2011. A new update to the ART's proprietary SAECG software, PREDICTOR®, expected to generate sales opportunities with ART's OEM customer in the Japanese market, was completed late in March 2012. This update to PREDICTOR is expected to yield revenues from license sales later in the year.
Revenue from domestic and foreign sales for the three month period is as follows:

Three months ended March 31,

                  2012        %         2011        %
United States $ 2,596,966     41    $ 2,666,295     43
Canada          1,800,209     29      1,903,889     31
Europe            699,474     11        643,260     11
Pacific Rim       587,125     9         509,972     8
Other             621,408     10        459,649     7
Total         $ 6,305,182    100%   $ 6,183,065    100%

Cost of Sales
The Company's consolidated cost of sales was $5,194,757 (82.4% of net sales) in the three months ended March 31, 2012 compared to $4,804,779 (77.7%% of net sales) in the three months ended March 31, 2011 an increase of $389,978 or 8.1% as discussed by segment below. The increase in the consolidated cost of sales is mainly due to the WirelessDx segment.
Micron cost of sales was $4,806,105 (77.3% of segment sales) in the three months ended March 31, 2012 compared to $4,732,079 (76.7% of segment sales) in the same period in 2011 an increase of $74,026 or 0.6%. The cost of silver has generally been passed on to our customers in the form of a surcharge. The surcharge protects Micron from decreasing gross profits from an increase in the cost of silver. Management routinely reviews its products and programs, including those in development, for contribution and value to our overall business strategy and results. Those that do not have contribution margins equal to or greater than the current average are the focus for process improvement teams. Programs with unacceptable margins will be phased out or discontinued, so that Micron's resources will be used to develop those of more strategic value.
WirelessDx cost of sales was $388,652 in the three months ended March 31, 2012 compared to $70,880 in the same period in 2011 an increase of $317,772. The large increase includes the initial startup cost of monitoring and patient call centers. This cost is expected to grow at a slower pace as facilities are fully staffed and functional.
ART cost of sales was $0 in the three months ended March 31, 2012 and $1,820 in the same period in 2011. This cost related to sales in the prior period. Selling and Marketing
The Company's consolidated selling and marketing expense increased to $629,965 (10.0% of net sales) in the three months ended March 31, 2012 from $360,013 (5.8% of net sales) in the same period in 2011, an increase of $269,952, or 75% as discussed by segment below.
Micron's selling and marketing expense decreased to $189,133 (3.0% of segment sales) in the three months ended March 31, 2012 from $208,709 (3.4% of segment sales) in the same period in 2011, a decrease of $19,576. Micron's selling expense remained stable but is expected to increase in 2012 due to higher sales commissions as new programs begin. The increase in selling expense is not expected to increase as a percentage of sales.

WirelessDx's selling and marketing expense increased to $391,375 in the three months ended March 31, 2012 from $106,523 in the same period in 2011, an increase of $284,852, or 267%. In 2012, the sales force was expanded during the first three months of 2012. Also contributing to the increase in expense was the cost of travel as the segment's growth included additional geographic markets. Business development expenses are expected to increase at a faster rate than revenue until scale is reached in late 2012.
ART's selling and marketing expense increased to $49,457 in the three months ended March 31, 2012 from $44,781 in in the same period in 2011, an increase of $4,676, or 10.4%. In 2012, expenses incurred were related to business development efforts, including travel and trade show expenses. General and Administrative Expenses
The Company's consolidated general and administrative expense was $975,380 (15.5% of net sales) in the three months ended March 31, 2012 as compared to $878,370 (14.2% of net sales) in the same period in 2011, an increase of $97,010 or 11.0% as discussed by segment below.
Micron's general and administrative expense decreased to $214,460 (3.4% of net sales) in the three months ended March 31, 2012 from $217,966 (3.5% of net sales) in the same period in 2011, a decrease of $3,506.
WirelessDx's general and administrative expense increased to $282,721 (4.5% of net sales) in the three months ended March 31, 2012 from $233,305 (3.8% of net sales) in the same period in 2011, an increase of $49,416. The expense for the segment includes executive salaries, back office support, and travel expenses. ART's general and administrative expense was $80,011 (1.3% of net sales) in the three months ended March 31, 2012 as compared to $75,242 (1.2% of net sales) in the same period in 2011, a increase of $4,769. This includes costs of the legal work on existing patents, travel expense associated with ART products and other costs to maintain the software library.
The Corporate segment increased to $398,188 (6.3% of net sales) in the three months ended March 31, 2012 from $351,857 (5.7% of net sales) in the same period in 2011, an increase of $46,331. A large portion of this increase was the centralization of the finance and human resources departments to the Corporate segment. In 2011, personnel were transfered to this segment to provide support across all segments of the business. Other corporate and travel expenses include expansion of the Board of Directors compared to the comparable period as well as attendance at trade events.
Research and Development
The Company's consolidated research and development costs increased to $136,740 (2.2% of net sales) in the three months ended March 31, 2012 from $81,208 (1.3% of net sales) in the same period in 2011, an increase of $55,532, or 68.4% as discussed by segment below.
Micron's research and development costs decreased to $36,888 (0.6% of net sales) in the three months ended March 31, 2012 from $49,852 (0.8% of net sales) in the same period in 2011, a decrease of $12,964, or 26.0%. The expense is related to process improvements on the Micron sensors and snap product lines as well as new processes and capabilities within MIT.
WirelessDx's research and development costs increased to $3,331 (0.1% of net sales) in the three months ended March 31, 2012 from $0 in the same period in 2011, and increase of $3,331. This expense is related to the documentation required for FDA clearance of devices.
ART's research and development expenses increased to $96,521 (1.5% of net sales) in the three months ended March 31, 2012 from $31,356 (0.5% of net sales) in the same period in 2011. Research and development expense in 2012 included the addition of a full-time employee, development work related to device accessories to be manufactured by Micron and used by WirelessDx, and additional technical consulting for PREDICTOR. The 2011 expenses included the technical support of a NIH research project utilizing ART's proprietary Signal Averaged ECG software and evaluation of other devices for software development. Other Expense, Net
Other expense was $7,625 in the three months ended March 31, 2012 compared to expense of $10,562 in the same period in 2011. Other expense consists of miscellaneous expense items and currency losses relating to foreign operations in Canada.
Income Taxes
The Company's combined federal and state effective income tax rate was (41%) and 44% in the three months ended March 31, 2012 and the same period in 2011, respectively. The effective rates differed from the statutory rates primarily due to state and federal investment tax credits.

Liquidity and Capital Resources

Working capital was $5,856,259 at March 31, 2012 compared to $6,118,678 at December 31, 2011, a decrease of $262,419. Capital investment may decrease working capital with any significant investment resulting from future acquisition of capital assets or businesses, significant expansion of production capacity, or further software and product development.
Cash and cash equivalents were $485,781 and $1,358,223 at March 31, 2012, and December 31, 2011, respectively. Substantially all of these funds are invested in bank deposit accounts.
Net capital expenditures were $810,400 for the first three months of 2012 as compared to $402,647 for the same period in 2011. The largest portion of the capital expenditures in 2012 resulted from the routine replacement of production equipment and tooling on the Micron sensor product line. Other capital expenditures included monitoring software, internal portal modifications and monitoring devices for WirelessDx. Capital expenditures for the three months ended March 31, 2012 were made with cash on hand and the Company's equipment lease line. The Company has a master lease agreement with its bank that allows for money to be drawn on standard terms for the purchase of equipment. Said monies will be paid back over the life of the equipment. During the three months ended March 31, 2012, $523,000 was drawn down to acquire production equipment for Micron and will be repaid over 5 years.
The Company has an unsecured demand line of credit with a large multinational bank with a credit limit of $3 million. The agreement provides for borrowings up to 80% of eligible accounts receivable plus 50% of finished goods inventories. This facility has no borrowing base charge. The agreement contains covenants that apply upon drawing on the line. The covenants relate to various matters including notice prior to executing further borrowings and security interests, merger or consolidation, acquisitions, guarantees, sales of assets other than in the normal course of business, leasing, changes in ownership and payment of dividends. No funds have been drawn down on this line during the quarter ended March 31, 2012, but subsequent to the end of the period $500,000 was drawn. Under this credit line, the Company has for the benefit of its subsidiary RMDDx secured a $1,000,000 letter of credit to replace the guarantee by the Province of Prince Edward Island.
During the three months ended March 31, 2012, the Board of Directors declared and paid a quarterly cash dividend of $0.03 per share for a total of $84,119. In the comparable period ended March 31, 2011, the Board of Directors declared and paid a semi-annual cash dividend of $0.06 per share for a total of $168,236. The Company has funded working capital and capital expenditures from operations and, subsequent to quarter end, from borrowings under the line of credit. Management believes that in the event the Company needs to fund working capital, and or future capital expenditures, financing alternatives are available.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. 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.
Management believes that the following are critical accounting policies:
Revenue Recognition
The Company recognizes revenue upon product shipment or completion of patient monitoring services, provided that there exists persuasive evidence of an arrangement, the fee is fixed or determinable, and collectability of the related receivable is reasonably assured. Revenue from contracted commercial payers is recorded at the negotiated contractual rate.
WirelessDx recognizes service revenues derived from event and mobile cardiac telemetry services, a significant portion of which is from third party commercial payers and governmental entities. It also receives reimbursement directly from patients through co-insurance, deductibles and self-pay arrangements. Gross revenue is adjusted for contractual adjustments and bad debt to an estimated net realizable value, based on historical information. Revenue is earned when service is completed.
Accounts Receivable
Based on management's on-going analysis of accounts receivable balances, as to any event that adversely affects the ultimate ability to collect the related receivable, management will record an allowance for bad debts. Bad debts have not had a significant impact on the Company's financial position, results of operations and cash flows.

Stock-Based Compensation
The Company accounts for share based compensation under ASC 718, "Stock Compensation" ("ASC 718"). ASC 718 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 results 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 statements of comprehensive income (loss). Inventory
The Company values its inventory at the lower of average cost or net realizable value (FIFO). 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.
The Company provides for excess, slow moving, and obsolete inventory. A review of inventory on hand is made at least annually and obsolete inventory may be scrapped and/or recycled. 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. The Company recognizes 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 accounts for goodwill and indefinite lived intangibles in accordance with ASC 350 "Intangibles - Goodwill and other". Goodwill is reviewed for impairment annually, or when events arise that could indicate that impairment exists. The provisions of ASC 350 require that the Company perform a two-step impairment test. In the first step, the Company compares the fair value of its reporting units to the carrying value of the reporting units. If the carrying value of the net assets assigned to the reporting units exceeds the fair value of the reporting units, then the second step of the impairment test is performed in order to determine the implied fair value of the reporting units' goodwill. If the carrying value of the reporting units' goodwill exceeds its implied fair value, an impairment loss equal to the difference is recorded.
At December 31, 2011, the market price of the Company's stock was trading lower than its book value for a prolonged period. The Company was required to acknowledge this as a possible triggering event and that an impairment may exist. In addition, the Company had reorganized its reporting unit structure to combine the three reporting units (Micron Products, New England Molders, and Leominster Tool) with goodwill into one reporting unit. The combined reporting unit better reflects the synergies between these components and aligns the segment with how management reviews and operates the business. An analysis of goodwill of the three reporting units prior to combining was performed to determine fair value using income and market approaches. The income approach is based on a discounted cash methodology that includes assumptions of, among other things, forecast income, cash flow, growth rates, and long-term discount rates, all of which require significant judgment. The market approach utilitizes the Company's market data as well as market data from publicly traded companies that are similar to the Company. There are inherent uncertainties related to these factors and the judgment applied in the analysis. Management determined an impairment was required for the Leominster Tool portion of the goodwill equal to $85,239. The Company changed the goodwill annual test date from March 31 to December 31 aligning the test with the year end audit. This change will provide more time for the Company to complete its assessment prior to its reporting deadline. As required, the Company's independent registered public accounting firm issued a preferability letter on the matter.

Asset Impairment - Long Lived Assets
In accordance with ASC 360, "Long Lived Assets", management assesses the impairment of long-lived assets and intangible assets with finite lives whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. When the Company's management determines that the carrying value of such assets may not be recoverable, management generally measures any impairment on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in its current business model.
Foreign operations
During 2011, it was determined that WirelessDx foreign operations functional currency is U.S. Dollars. Assets and liabilities are maintained in U.S. dollars. Gains and losses resulting from transactions which are denominated in other than the functional currency are reported as other income or loss in the statements of comprehensive income (loss) in the period the gain or loss is occurred.