The following discussion and analysis of financial condition and results of operations should be read in conjunction with the 2007 consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007. When necessary, reclassifications have been made to prior period data throughout the following discussion and analysis for purposes of comparability. This Quarterly Report on Form 10-Q contains certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as "believe", "expect", "anticipate", "should", "planned", "estimated" and "potential". Examples of forward looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Unity Bancorp, Inc. that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, in addition to those items contained in the Company's Annual Report on Form 10-K under Item IA-Risk Factors, as updated by our subsequent Quarterly Report on Form 10-Q, the following: changes in general, economic, and market conditions, legislative and regulatory conditions, or the development of an interest rate environment that adversely affects Unity Bancorp, Inc.'s interest-rate spread or other income anticipated from operations and investments.

Overview

Unity Bancorp, Inc., (the "Parent Company"), is incorporated in New Jersey and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Its wholly-owned subsidiary, Unity Bank (the "Bank" or, when consolidated with the Parent Company, the "Company") was granted a charter by the New Jersey Department of Banking and Insurance and commenced operations on September 13, 1991. The Bank provides a full range of commercial and retail banking services through 16 branch offices located in Hunterdon, Somerset, Middlesex, Union and Warren counties in New Jersey, and Northampton County in Pennsylvania. These services include the acceptance of demand, savings, and time deposits and the extension of consumer, real estate, Small Business Administration and other commercial credits. Unity Investment Services, Inc., a wholly-owned subsidiary of the Bank, is used to hold part of the Bank's investment portfolio. Unity Participation Company, Inc., a wholly-owned subsidiary of the Bank is used for holding and administering certain loan participations.

Unity (NJ) Statutory Trust II is a statutory Business Trust and wholly owned subsidiary of Unity Bancorp, Inc. On July 24, 2006, the Trust issued $10.0 million of trust preferred securities to investors. Unity (NJ) Statutory Trust III is a statutory Business Trust and wholly owned subsidiary of Unity Bancorp, Inc. On December 19, 2006, the Trust issued $5.0 million of trust preferred securities to investors. These floating rate securities are treated as subordinated debentures on the Company's financial statements. However, they qualify as Tier I Capital for regulatory capital compliance purposes, subject to certain limitations. In accordance with Financial Accounting Interpretation No. 46, Consolidation of Variable Interest Entities, as revised December 2003, the Company does not consolidate the accounts and related activity of any of its business trust subsidiaries.

Earnings Summary

The past nine months have been a period of unprecedented financial, credit and capital market stress. Factors such as lack of liquidity in the credit markets, financial institution failures, continued fall-out from the subprime mortgage crisis, asset "fair market" value write-downs, capital adequacy and credit quality concerns have resulted in a lack of confidence by the markets in the financial industry. Consumer sentiment remained low and consumer spending contracted due to concerns over employment, housing and stock market values.

As a result of these stresses, secondary markets for many types of financial assets, including the guaranteed portion of SBA loans, have closed down or become very restrictive. Consequently, late in the third quarter we closed our SBA origination offices outside of our New Jersey, New York and Pennsylvania primary trade areas. Although we believe this will lead to reduced SBA loan origination volume and premiums on sale for the foreseeable future, we believe these cost savings are prudent given the current market environment.

During the third quarter, this lack of confidence became so strained that Congress intervened with its Emergency Economic Stabilization Act (the "Act") to address the dysfunctional markets. This Act authorized the Troubled Asset Relief Program which will provide capital to financial institutions and purchase troubled mortgages from institutions. Institutions may apply to participate in the Treasury's Capital Purchase Program ("CPP"), under which the Treasury will purchase newly issued preferred stock and common stock purchase warrants from financial institutions or their holding companies. Although we are continuing to analyzing the terms of the CPP program, which have undergone numerous revisions, we have applied to participate in the CPP to ensure that we will remain eligible for the CPP if we determine it is in our shareholders best interests to participate.

In addition, the Act authorized the temporary increase in the FDIC insurance limit to $250 thousand from $100 thousand per account. Finally, the FDIC implemented a program to insure all deposits held in non-interest bearing transactional accounts, regardless of amount, at institutions which do not opt out of the program and which pay an additional assessment to the FDIC. These governmental actions were designed to rebuild confidence in the financial markets, increase liquidity and strengthen the financial sector.

The Federal Reserve Board lowered rates three times for a total of 200 basis points during the first quarter of 2008 and 25 basis points in the beginning of the second quarter of 2008 in an attempt to stimulate economic growth. These rate reductions brought the Fed Funds target rate down to 2.00 percent by the end of the second quarter and the Prime lending rate to 5.00 percent. The decrease in short-term rates normalized the Treasury yield curve as opposed to the flat and at times inverted Treasury yield curve which existed during 2006 and 2007. There were no rate reductions during the third quarter; however, a 50 basis point cut was announced October 9th in a coordinated move with other central banks worldwide in an attempt to calm the markets and stimulate economic activity. Finally, on October 29th, the Federal Reserve cut rates another 50 basis points, reducing the Fed Funds target rate to an historical low of 1.00 percent.

Despite this challenging operating environment, our performance included the following accomplishments:
· Total assets exceeded $864 million,

· Continued market share expansion as total loans increased 20.7 percent from one year ago,

· Total deposits increased 11.8 percent from one year ago,

· The Company remained well capitalized.

For the three months ended September 30, 2008, the Company reported a net loss of $1.0 million, a decrease from net income of $1.1 million for the same period in 2007. For the nine months ended September 30, 2008, net income was $1.3 million, or $0.19 per diluted share, compared to $4.0 million, or $0.53 per diluted share for the same period a year ago.

Earnings for the quarter and nine months ended were impacted by the sale and other-than-temporary impairment charges ("OTTI") on Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") perpetual callable preferred securities. Unity sold approximately $909 thousand in book value of these securities in August 2008 and recorded a pretax loss of approximately $518 thousand on this sale. In addition, the market value of the remaining securities was written down as of September 30, 2008, due to actions by the U.S. Treasury and the OFHEO (now FHFA) placing Freddie Mac under conservatorship. The aggregate amount of security losses and OTTI charges related to Freddie Mac perpetual preferred stock for the third quarter of 2008 were $1.5 million, pre-tax, or $950 thousand, $0.13 per diluted share after tax. Over the nine month period, security losses and OTTI charges of $1.6 million were realized on the FHLMC perpetual preferred stock. In addition to the FHLMC charges described above, the Company recorded a quarterly provision for loan losses of $2.1 million, an increase of $1.7 million compared to $450 thousand recorded a year ago.

While the reported results for the three and nine month periods reflect the effects of the OTTI charge, they do not reflect the change in tax treatment enacted as part of the Act, which was adopted on October 3, 2008. Under the Act, the Company is permitted to deduct the loss related to FHLMC perpetual preferred stock as an ordinary loss for tax purposes, thereby offsetting a portion of the Company's ordinary income. However, since the Act was not enacted until the fourth quarter 2008, the Company cannot recognize this tax benefit as part of its third quarter results. The tax benefit will be recognized in the fourth quarter, and it is expected to amount to approximately $239 thousand or $.03 per diluted share, based on the average shares outstanding for the quarter ended September 30, 2008.

                                             Three Months ended September 30,             Nine months ended September 30,
(In thousands, except per share data)          2008                    2007                2008                     2007
Net Income per Common share:
Basic                                      $       (0.14 )         $        0.15     $           0.19         $           0.55
Diluted                                            (0.14 )                  0.14                 0.19                     0.53
Return on average assets                           (0.47 )      %           0.57 %               0.22 %                   0.77 %
Return on average common equity                    (8.45 )      %           8.89 %               3.77 %                  11.57 %
Efficiency ratio                                   70.51        %          74.23 %              70.68 %                  70.57 %

In addition to the impairment charge and loan loss provision noted above, our results reflect:
· Increased net interest income on strong earning asset growth,

· A lower level of net gains on SBA loan sales as a result of a lower volume of loans sold and reduced premiums on sales, and

· Higher operating expenses related to the expansion of our retail and lending networks.

Tax-equivalent interest income totaled $13.0 million for the three months ended September 30, 2008, an increase of $389 thousand or 3.1 percent, compared to a year ago. Of the $389 thousand increase in interest income, $1.9 million was due to an increase in the volume of interest-earning assets, partially offset by a $1.5 million decrease due to lower yields on interest-earning assets. The average volume of interest-earning assets increased $102.2 million to $802.4 million for the three months ended September 30, 2008 due to a $112.3 million increase in average total loans as loans increased in all categories. The tax-equivalent yield on interest-earning assets decreased 71 basis points to 6.45 percent during the period as variable rate assets such as SBA loans, commercial loans, consumer home equity loans and federal funds sold and interest-bearing deposits with banks repriced lower. The mix of earning assets is illustrated below:

                                                   9/30/2008     9/30/2007
Federal funds sold and interest-bearing deposits           3 %           4 %
Securities (includes ACBB and FHLB stock)                 13            16
Loans                                                     84            80

Total interest expense was $5.9 million for the three months ended September 30, 2008, a decrease of $711 thousand or 10.8 percent, compared to $6.6 million for the same period a year ago. The $711 thousand decrease in interest expense, was primarily due to a $1.8 million decrease due to a reduction in the cost of funds, partially offset by $1.1 million increase which was related to an increase in average interest-bearing liabilities. Quarter over quarter, average interest-bearing liabilities increased $102.1 million as average interest-bearing deposits increased $81.3 million and borrowed funds and subordinated debentures increased $20.8 million. The increase in average interest-bearing deposits was a result of increases in the time deposit and interest-bearing demaand deposits categories, partially offset by a decline in savings accounts. The increase in average borrowed funds and subordinated debentures was a result of favorable pricing compared to alternative sources of funds as rates began to fall. The rate paid on interest-bearing liabilities decreased 99 basis points to 3.28 percent for the three months ended September 30, 2008, from 4.27 percent in the same period in 2007. The cost of interest-bearing deposits decreased 101 basis points to 3.12 percent as the rates paid on all deposit products decreased, while the cost of borrowed funds and subordinated debentures decreased 95 basis points to 4.14 percent. These rates fell as our variable rate instruments tied to Prime and LIBOR repriced lower and other fixed rate products were repriced lower. At the same time, the interest-bearing deposit base shifted to a higher cost of funding as illustrated below:

                                   9/30/2008     9/30/2007
Interest-bearing demand deposits          15 %          15 %
Savings deposits                          27            38
Time deposits                             58            47

Tax-equivalent net interest income increased $1.1 million to $7.1 million for the quarter ended September 30, 2008, compared to $6.0 million for the same period a year ago. Net interest margin increased 11 basis points to 3.55 percent, compared to 3.44 percent for the same period a year ago. The net interest spread was 3.17 percent for the three months ended September 30, 2008, compared to 2.89 percent for the same period a year ago.

Tax-equivalent interest income totaled $38.0 million for the nine months ended September 30, 2008, an increase of $1.7 million or 4.5 percent, compared to a year ago. Of the $1.7 million increase in interest income, $5.1 million was due to an increase in the volume of interest-earning assets, partially offset by a $3.4 million decrease due to lower yields on interest-earning assets. The average volume of interest-earning assets increased $91.7 million to $763.5 million for the nine months ended September 30, 2008 due to a $92.6 million increase in average total loans as loans increased in all categories. The tax-equivalent yield on interest-earning assets decreased 58 basis points to 6.64 percent during the period as variable rate assets such as SBA loans, commercial loans, consumer home equity loans and federal funds sold and interest-bearing deposits with banks repriced lower. The mix of earning assets remained as follows:

                                                   9/30/2008     9/30/2007
Federal funds sold and interest-bearing deposits           3 %           4 %
Securities (includes ACBB and FHLB stock)                 14            16
Loans                                                     83            80

Total interest expense was $17.3 million for the nine months ended September 30, 2008, a decrease of $853 thousand or 4.7 percent, compared to $18.2 million for the same period a year ago. The $853 thousand decrease in interest expense reflects a $4.2 million decrease due to a reduction in the cost of funds, partially offset by a $3.4 million increase which was related to an increase in average interest-bearing liabilities. Average interest-bearing liabilities increased $95.5 million as average interest-bearing deposits increased $72.5 million and borrowed funds and subordinated debentures increased $23.0 million. The increase in average interest-bearing deposits was a result of increases in the time deposit category, partially offset by a decline in interest-bearing checking and savings accounts. The increase in average borrowed funds and subordinated debentures was a result of favorable pricing compared to alternative sources of funds as rates began to fall. The rate paid on interest-bearing liabilities decreased 77 basis points to 3.43 percent for the nine months ended September 30, 2008, from 4.20 percent in the same period in 2007. The cost of interest-bearing deposits decreased 74 basis points to 3.29 percent as the rates paid on all deposit products decreased, while the cost of borrowed funds and subordinated debentures decreased 100 basis points to 4.20 percent. These rates fell as our variable rate instruments tied to Prime and Libor repriced lower and other fixed rate products were repriced lower. At the same time, the deposit concentration fluctuation illustrated below partially offset the benefit of lower rates as customers shifted into higher costing time deposits.

                                   9/30/2008     9/30/2007
Interest-bearing demand deposits          15 %          18 %
Savings deposits                          32            42
Time deposits                             53            40

Tax-equivalent net interest income increased $2.5 million to $20.7 million for the nine months ended September 30, 2008, compared to $18.2 million for the same period a year ago. Net interest margin remained flat at 3.61 percent. The net interest spread was 3.21 percent for the nine months ended September 30, 2008, compared to 3.06 percent for the same period a year ago.

Total interest-earning assets $ 802,400 $ 12,996 6.45 % $ 700,240 $ 12,607 7.16 % Noninterest-earning assets:
Cash and due from banks 19,166 14,911 Allowance for loan losses (9,092 ) (8,330 ) Other assets 32,229 29,503 Total noninterest-earning 36,084 assets 42,303 Total Assets $ 844,703 $ 736,324

Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing checking $ 87,903 $ 404 1.83 % $ 79,188 $ 451 2.26 % Savings deposits 161,707 774 1.90 199,483 1.995 3.97 Time deposits 353,743 3,553 4.00 243,358 2,994 4.88 Total interest-bearing 522,029 5,440 4.13 deposits 603,353 4,731 3.12 Borrowed funds and subordinated 89,892 1,153 5.09 debentures 110,684 1,152 4.14 Total interest-bearing 611,921 6,593 4.27 liabilities 714,037 5,883 3.28 Noninterest-bearing liabilities:
Demand deposits 81,157 75,218 Other liabilities 2,321 2,216 Total noninterest-bearing 77,434 liabilities 83,478 Shareholders' equity 47,188 46,969 Total Liabilities and
Shareholders' Equity $ 844,703 $ 736,324

Net interest spread $ 7,113 3.17 % $ 6,014 2.89 % Tax-equivalent basis adjustment (31 ) (41 ) Net interest income $ 7,082 $ 5,973 Net interest margin 3.55 % 3.44 %

(a) Yields related to securities and loans exempt from federal income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 34 percent.
(b) The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.

Total interest-earning assets $ 763,500 $ 37,996 6.64 % $ 668,581 $ 36,344 7.26 % Noninterest-earning assets:
Cash and due from banks 16,189 13,113 Allowance for loan losses (8,866 ) (8,078 ) Other assets 31,268 29,363 Total noninterest-earning 34,398 assets 38,591 Total Assets $ 802,091 $ 702,979

Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing checking $ 83,050 $ 1,120 1.80 % $ 87,095 $ 1,480 2.27 % Savings deposits 179,254 3,041 2.27 207,238 6.288 4.06 Time deposits 304,298 9,779 4.29 199,798 7,117 4.76 Total interest-bearing 494,131 14,885 4.03 deposits 566,602 13,940 3.29 Borrowed funds and subordinated 84,334 3,279 5.20 debentures 107,345 3,372 4.20 Total interest-bearing 578,465 18,164 4.20 liabilities 673,947 17,312 3.43 Noninterest-bearing liabilities:
Demand deposits 78,259 75,303 Other liabilities 2,354 2,466 Total noninterest-bearing 77,769 liabilities 80,613 Shareholders' equity 47,531 46,745 Total Liabilities and
Shareholders' Equity $ 802,091 $ 702,979

Net interest spread $ 20,684 3.21 % $ 18,180 3.06 % Tax-equivalent basis adjustment (129 ) (101 ) . . .