# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-Q

# [X] QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE
ACT OF 1934

# FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2007

OR

# [   ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE
ACT OF 1934

# FOR THE TRANSITION
PERIOD FROM _____ TO _____.

Commission file number:
000-50015

---

|TierOne Corporation                                   
|------------------------------------------------------
|(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

|Wisconsin                                                      | 04-3638672                          
|-------------------------------------------------------------- | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.)
|1235 N Street                                               
|Lincoln, Nebraska                                              | 68508                               
|(Address of Principal Executive Offices)                       | (Zip Code)                          

|(402) 475-0521                                      
|----------------------------------------------------
|(Registrants Telephone Number, Including Area Code)

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer 
                  Accelerated filer     X      Non-accelerated filer

Indicated by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
          Yes               No     X

As of November 5, 2007, there were
18,059,260 issued and outstanding shares of the Registrants common stock.

---

# PART I - FINANCIAL
INFORMATION

|         |                                                                                      
|-------- | -------------------------------------------------------------------------------------
|Item 1 - | Financial Statements                                                                 
|Item 2 - | Managements Discussion and Analysis of Financial Condition
and Results of Operations
|Item 3 - | Quantitative and Qualitative Disclosures About Market Risk                           
|Item 4 - | Controls and Procedures                                                              

# PART II - OTHER
INFORMATION

|Item 1 -      | Legal Proceedings                                           | 60
|------------- | ----------------------------------------------------------- | --
|Item 1A -     | Risk Factors                                                | 61
|Item 2 -      | Unregistered Sales of Equity Securities and Use of Proceeds | 66
|Item 3 -      | Defaults Upon Senior Securities                             | 66
|Item 4 -      | Submission of Matters to a Vote of Security Holders         | 66
|Item 5 -      | Other Information                                           | 66
|Item 6 -      | Exhibits                                                    | 66
|Signatures    |                                                             | 67
|Exhibit Index |                                                             | 68

2

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# Item 1  Financial
Statements

# TierOne Corporation
and Subsidiaries Consolidated Statements of Financial Condition September 30, 2007
(Unaudited) and December 31, 2006

|(Dollars in thousands, except per share data)                     | September 30, 2007 | December 31, 2006
|----------------------------------------------------------------- | ------------------ | -----------------
|ASSETS                                                            |                    |                  
|Cash and cash equivalents                                         |                    |                  
|Federal funds sold                                                |                    |                  
|                                                                 
|Total cash and cash equivalents                                   |                    |                  
|                                                                 
|Investment securities:                                            |                    |                  
|Held to maturity, at cost which approximates fair value           |                    |                  
|Available for sale, at fair value                                 |                    |                  
|Mortgage-backed securities, available for sale, at fair value     |                    |                  
|Loans receivable:                                                 |                    |                  
|Net loans (includes loans held for sale of $20,462 and $19,285 at |                    |                  
|September 30, 2007 and December 31, 2006, respectively)           |                    |                  
|Allowance for loan losses                                         |                    |                  
|                                                                 
|Net loans after allowance for loan losses                         |                    |                  
|                                                                 
|FHLBank Topeka stock, at cost                                     |                    |                  
|Premises and equipment, net                                       |                    |                  
|Accrued interest receivable                                       |                    |                  
|Goodwill                                                          |                    |                  
|Other intangible assets, net                                      |                    |                  
|Mortgage servicing rights (lower of cost or market), net          |                    |                  
|Other assets                                                      |                    |                  
|                                                                 
|Total assets                                                      |                    |                  
|                                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY                              |                    |                  
|Liabilities:                                                      |                    |                  
|Deposits                                                          |                    |                  
|FHLBank Topeka advances and other borrowings                      |                    |                  
|Advance payments from borrowers for taxes, insurance and          |                    |                  
|other escrow funds                                                |                    |                  
|Accrued interest payable                                          |                    |                  
|Accrued expenses and other liabilities                            |                    |                  
|                                                                 
|Total liabilities                                                 |                    |                  
|                                                                 
|Stockholders equity:                                             |                    |                  
|Preferred stock, $0.01 par value. 10,000,000 shares authorized;   |                    |                  
|none issued                                                       |                    |                  
|Common stock, $0.01 par value.  60,000,000 shares authorized;     |                    |                  
|18,054,202 and 18,041,413 shares issued at                        |                    |                  
|September 30, 2007 and December 31, 2006, respectively            |                    |                  
|Additional paid-in capital                                        |                    |                  
|Retained earnings, substantially restricted                       |                    |                  
|Treasury stock, at cost; 4,520,873 and 4,533,662 shares at        |                    |                  
|September 30, 2007 and December 31, 2006, respectively            |                    |                  
|Unallocated common stock held by Employee Stock                   |                    |                  
|Ownership Plan                                                    |                    |                  
|Accumulated other comprehensive loss, net                         |                    |                  
|                                                                 
|Total stockholders equity                                        |                    |                  
|                                                                 
|Total liabilities and stockholders equity                        |                    |                  
|                                                                 

See accompanying notes to
consolidated financial statements.

3

---

# TierOne Corporation
and Subsidiaries Consolidated Statements of Income
(Unaudited)

|                                                    | For the Three Months Ended
September 30, | For the Nine Months Ended
September 30,
|--------------------------------------------------- | ---------------------------------------- | ---------------------------------------
|
|Interest income:                                    |                                          |                                        
|Loans receivable                                    |                                          |                                        
|Investment securities                               |                                          |                                        
|Other interest-earning assets                       |                                          |                                        
|                                                   
|Total interest income                               |                                          |                                        
|                                                   
|Interest expense:                                   |                                          |                                        
|Deposits                                            |                                          |                                        
|FHLBank Topeka advances and other borrowings        |                                          |                                        
|                                                   
|Total interest expense                              |                                          |                                        
|                                                   
|Net interest income                                 |                                          |                                        
|Provision for loan losses                           |                                          |                                        
|                                                   
|Net interest income after provision for loan losses |                                          |                                        
|                                                   
|Noninterest income:                                 |                                          |                                        
|Fees and service charges                            |                                          |                                        
|Debit card fees                                     |                                          |                                        
|Loss from real estate operations, net               |                                          |                                        
|Net gain (loss) on sales of:                        |                                          |                                        
|Investment securities                               |                                          |                                        
|Loans held for sale                                 |                                          |                                        
|Real estate owned                                   |                                          |                                        
|Other operating income                              |                                          |                                        
|                                                   
|Total noninterest income                            |                                          |                                        
|                                                   
|Noninterest expense:                                |                                          |                                        
|Salaries and employee benefits                      |                                          |                                        
|Occupancy, net                                      |                                          |                                        
|Data processing                                     |                                          |                                        
|Advertising                                         |                                          |                                        
|Other operating expense                             |                                          |                                        
|                                                   
|Total noninterest expense                           |                                          |                                        
|                                                   
|Income (loss) before income taxes                   |                                          |                                        
|Income tax expense (benefit)                        |                                          |                                        
|                                                   
|Net income (loss)                                   |                                          |                                        
|                                                   
|Net income (loss) per common share, basic           |                                          |                                        
|                                                   
|Net income (loss) per common share, diluted         |                                          |                                        
|                                                   
|Dividends declared per common share                 |                                          |                                        
|                                                   
|Average common shares outstanding, basic (000s)    |                                          |                                        
|                                                   
|Average common shares outstanding, diluted (000s)  |                                          |                                        
|                                                   

See accompanying notes to
consolidated financial statements.

4

---

# TierOne Corporation
and Subsidiaries Consolidated
Statements of Changes in Stockholders Equity and Comprehensive Income For the Nine Months
Ended September 30, 2007 and 2006 (Unaudited)

|(Dollars in thousands)                   | Common Stock | Additional Paid-In Capital | Retained Earnings, Substantially Restricted | Treasury Stock | UnallocatedCommon StockHeld by theEmployee StockOwnership Plan | Unearned Common StockHeld by theManagementRecognition andRetention Plan | Accumulated OtherComprehensive Loss,Net | Total Stockholders Equity
|---------------------------------------- | ------------ | -------------------------- | ------------------------------------------- | -------------- | -------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------- | --------------------------
|Balance at December 31, 2005             |              |                            | $                                           | 226            |                                                                | $                                                                       | 358,587                                 |                           
|                                        
|Common stock earned by employees         |              |                           
|in Employee Stock Ownership Plan         |              |                            |                                             | --             |                                                                |                                                                         | 2,576                                   |                           
|Transfer of unearned common stock held   |              |                           
|by the Management Recognition and        |              |                           
|Retention Plan upon adoption of          |              |                           
|SFAS No. 123(R)                          |              |                            |                                             | --             |                                                                |                                                                         | (9,368                                  | )                         
|Amortization of awards under the         |              |                           
|Management Recognition and               |              |                           
|Retention Plan                           |              |                            |                                             | --             |                                                                |                                                                         | 2,178                                   |                           
|Amortization of stock options  under     |              |                           
|2003 Stock Option Plan upon              |              |                           
|adoption of SFAS No. 123(R)              |              |                            |                                             | --             |                                                                |                                                                         | 1,261                                   |                           
|Repurchase of common stock               |              |                           
|(21,724 shares)                          |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|Treasury stock reissued under 2003       |              |                           
|Stock Option Plan                        |              |                            |                                             | --             |                                                                |                                                                         | (216                                    | )                         
|Excess tax benefit realized from stock-  |              |                           
|based compensation plans                 |              |                            |                                             | --             |                                                                |                                                                         | 939                                     |                           
|Tax benefit realized from certain costs  |              |                           
|deducted in mutual to stock conversion   |              |                            |                                             | --             |                                                                |                                                                         | 780                                     |                           
|Dividends paid ($0.20 per common share)  |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|Comprehensive income:                    |              |                           
|Net income                               |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|Change in unrealized loss on             |              |                           
|available for sale securities, net of    |              |                           
|tax and reclassification adjustment      |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|                                        
|Total comprehensive income               |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|                                        
|Balance at September 30, 2006            |              |                            | $                                           | 226            |                                                                | $                                                                       | 356,737                                 |                           
|                                        
|Balance at December 31, 2006             |              |                            | $                                           | 226            |                                                                | $                                                                       | 358,733                                 |                           
|                                        
|Common stock earned by employees         |              |                           
|in Employee Stock Ownership Plan         |              |                            |                                             | --             |                                                                |                                                                         | 1,951                                   |                           
|Amortization of awards under the         |              |                           
|Management Recognition and               |              |                           
|Retention Plan                           |              |                            |                                             | --             |                                                                |                                                                         | 2,178                                   |                           
|Amortization of stock options under      |              |                           
|2003 Stock Option Plan                   |              |                            |                                             | --             |                                                                |                                                                         | 1,261                                   |                           
|Repurchase of common stock               |              |                           
|(7,111 shares)                           |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|Treasury stock reissued under 2003       |              |                           
|Stock Option Plan                        |              |                            |                                             | --             |                                                                |                                                                         | (108                                    | )                         
|Excess tax benefit realized from stock-  |              |                           
|based compensation plans                 |              |                            |                                             | --             |                                                                |                                                                         | 423                                     |                           
|Dividends paid ($0.23 per common share)  |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|Cumulative effect of adoption of FASB    |              |                           
|Interpretation No. 48 on January 1, 2007 |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|Comprehensive income:                    |              |                           
|Net income                               |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|Change in unrealized loss on             |              |                           
|available for sale securities, net of    |              |                           
|tax and reclassification adjustment      |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|                                        
|Total comprehensive income               |              |                            |                                             | --             |                                                                |                                                                         | --                                      |                           
|                                        
|Balance at September 30, 2007            |              |                            | $                                           | 226            |                                                                | $                                                                       | 364,438                                 |                           
|                                        

See accompanying notes to
consolidated financial statements.

5

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# TierOne Corporation
and Subsidiaries Consolidated
Statements of Cash Flows (Unaudited)

|                                                                                    | For the Nine Months Ended
September 30,
|----------------------------------------------------------------------------------- | ---------------------------------------
|
|Cash flows from operating activities:                                               |                                        
|Net income                                                                          |                                        
|Adjustments to reconcile net income to net cash provided by operating activities:   |                                        
|Net premium amortization (accretion) of investment and mortgage-backed securities   |                                        
|Premises and equipment depreciation and amortization                                |                                        
|Amortization of other intangible assets                                             |                                        
|Amortization of discount on FHLBank Topeka advances                                 |                                        
|Employee Stock Ownership Plan compensation expense                                  |                                        
|2003 Management Recognition and Retention Plan compensation expense                 |                                        
|2003 Stock Option Plan compensation expense                                         |                                        
|Accretion of discounts on net loans                                                 |                                        
|FHLBank Topeka stock dividend                                                       |                                        
|Deferred income tax expense (benefit)                                               |                                        
|Provision for loan losses                                                           |                                        
|Provision for real estate owned losses                                              |                                        
|Provision for uncollectible receivable                                              |                                        
|Proceeds from sales of loans held for sale                                          |                                        
|Originations and purchases of loans held for sale                                   |                                        
|Excess tax benefits from stock-based compensation plans                             |                                        
|Net (gain) loss on sales of:                                                        |                                        
|Investment securities                                                               |                                        
|Loans held for sale                                                                 |                                        
|Real estate owned                                                                   |                                        
|Premises and equipment                                                              |                                        
|Changes in certain assets and liabilities:                                          |                                        
|Accrued interest receivable                                                         |                                        
|Other assets                                                                        |                                        
|Accrued interest payable                                                            |                                        
|Accrued expenses and other liabilities                                              |                                        
|                                                                                   
|Net cash provided by operating activities                                           |                                        
|                                                                                   
|Cash flows from investing activities:                                               |                                        
|Purchase of investment and mortgage-backed securities, available for sale           |                                        
|Proceeds from sale of investment and mortgage-backed securities, available for sale |                                        
|Proceeds from maturities of investment securities, available for sale               |                                        
|Proceeds from principal repayments of investment and mortgage-backed                |                                        
|securities, available for sale and held to maturity                                 |                                        
|Decrease (increase) in loans receivable                                             |                                        
|Additions to premises and equipment                                                 |                                        
|Proceeds from sale of premises and equipment                                        |                                        
|Proceeds from sale of real estate owned                                             |                                        
|Marine Bank branch purchase - net of cash acquired                                  |                                        
|                                                                                   
|Net cash used in investing activities                                               |                                        
|                                                                                   

See accompanying notes to
consolidated financial statements.

6

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# TierOne Corporation
and Subsidiaries Consolidated Statements of Cash Flows (continued) (Unaudited)

|                                                                                  | For the Nine Months Ended
September 30,
|--------------------------------------------------------------------------------- | ---------------------------------------
|
|Cash flows from financing activities:                                             |                                        
|Net increase (decrease) in deposits                                               |                                        
|Net advances (repayment) on FHLBank Topeka line of credit, short-term             |                                        
|advances and other borrowings                                                     |                                        
|Proceeds from FHLBank Topeka long-term advances and other borrowings              |                                        
|Repayments of FHLBank Topeka long-term advances and other borrowings              |                                        
|Net decrease in advances from borrowers for taxes, insurance and                  |                                        
|other escrow funds                                                                |                                        
|Repurchase of common stock                                                        |                                        
|Dividends paid on common stock                                                    |                                        
|Excess tax benefit realized from the exercise of stock options                    |                                        
|Excess tax benefit realized from Management Recognition and Retention Plan shares |                                        
|Proceeds from the exercise of stock options                                       |                                        
|                                                                                 
|Net cash provided by financing activities                                         |                                        
|                                                                                 
|Net increase (decrease) in cash and cash equivalents                              |                                        
|Cash and cash equivalents at beginning of period                                  |                                        
|                                                                                 
|Cash and cash equivalents at end of period                                        |                                        
|                                                                                 
|Supplemental disclosures of cash flow information:                                |                                        
|Cash paid during period for:                                                      |                                        
|Interest                                                                          |                                        
|Income taxes, net of refunds                                                      |                                        
|                                                                                 
|Noncash investing activities:                                                     |                                        
|Transfers from loans to real estate owned and other assets through foreclosure    |                                        
|                                                                                 

See accompanying notes to
consolidated financial statements.

7

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 1  Basis of
Presentation and Consolidation

TierOne
Corporation (Company) is a Wisconsin corporation headquartered in Lincoln,
Nebraska. TierOne Corporation is the holding company for TierOne Bank (Bank).
The Bank has two wholly owned subsidiaries, TMS Corporation of the Americas
(TMS) and United Farm & Ranch Management, Inc. (UFARM). TMS is
the holding company of TierOne Investments and Insurance, Inc. (d/b/a TierOne Financial),
a wholly owned subsidiary that administers the sale of securities and insurance products,
and TierOne Reinsurance Company, a wholly owned subsidiary that reinsures credit life and
disability insurance policies. UFARM provides agricultural customers with professional
farm and ranch management and real estate brokerage services. The accompanying unaudited
consolidated financial statements include the accounts of the Bank and its wholly owned
subsidiaries.

The
assets of the Company, on an unconsolidated basis, primarily consist of 100% of the
Banks common stock. The Company has no significant independent source of income and
therefore depends on cash distributions from the Bank to meet its funding requirements.

The
accompanying interim consolidated financial statements as of September 30, 2007 and for
the three and nine months ended September 30, 2007 and 2006 are unaudited. All significant
intercompany accounts and transactions have been eliminated in consolidation. In the
opinion of management, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation of the financial position and operating results for interim periods.
The unaudited consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP) for interim financial
information, in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X
promulgated by the Securities and Exchange Commission (SEC), and do not
include all of the information and notes required for complete, audited financial
statements. The unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations
for the three and nine months ended September 30, 2007 are not necessarily indicative of
the results which may be expected for the entire calendar year 2007.

Subsequent
to the filing of our June 30, 2007 Quarterly Report on Form 10-Q, we assumed servicing of
all loans purchased from TransLand Financial Services, Inc. (TransLand), a
Florida mortgage brokerage firm. This step has allowed us to directly contact each
borrower and restructure terms for their loan where appropriate. To assist in the
settlement and completion of these loans, we have implemented a plan dedicating a team of
Bank loan officers, servicers and collection professionals whose responsibility is to be
primarily focused on these loans. This team is working closely with individual borrowers,
local builders, city officials, local real estate professionals and legal counsel in
working toward completing homes under construction, renegotiating loan terms, servicing
loans and pursuing legal and foreclosure remedies.

During
our due diligence process related to the transfer of residential construction loan
servicing from TransLand to the Bank, alleged fraudulent servicing practices were
discovered. The majority of the alleged fraud related to the withholding of loan payoff
proceeds and periodic payments. A joint petition for involuntary Chapter 11 bankruptcy
was filed on August 23, 2007 in the United States Bankruptcy Court for the Middle
District of Florida by the Bank and two other financial institutions against TransLand.
In addition to seeking recoveries from TransLand, the Bank is also insured up to $7.5
million against fraudulent activity by loan servicers. A $6.9 million receivable from
TransLand associated with the alleged misappropriation of loan payoff proceeds and
periodic payments due to the Bank was recorded as loans receivable at June 30, 2007.
During the quarter ended September 30, 2007, the $6.9 million receivable increased to
$12.2 million. The Company determined the recovery from its insurance carrier was
probable and wrote-off $4.8 million of the receivable as a charge to other operating
expense during the third quarter. A receivable of $7.4 million is now recorded as other
assets on the Companys Consolidated Statements of Financial Condition at September
30, 2007. Any future recoveries from TransLand beyond the insurance policy amount would
be recorded as other operating income or a reduction of other operating expense depending
upon the periods in which the funds are received. Management determined that the effect
of the modification was not material in relation to the consolidated financial statements
included in our June 30, 2007 Quarterly Report of Form 10-Q.

As
used in this report, unless the context otherwise requires, the terms we,
us, or our refer to the Company and the Bank.

8

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 2  Definitive
Acquisition Agreement

On
May 17, 2007, TierOne Corporation, CapitalSource Inc. (CapitalSource) and
CapitalSource TRS Inc. (CapitalSource TRS) entered into and announced an
Agreement and Plan of Merger (Merger Agreement). The Merger Agreement provides
that, upon the terms and subject to conditions set forth in the Merger Agreement, the
Company will merge with and into CapitalSource TRS (Merger), with
CapitalSource TRS continuing as the surviving corporation.

Subject
to the terms and conditions of the Merger Agreement, at the effective time and as a result
of the Merger, each issued and outstanding share of Company common stock (other than
certain shares owned by the Company), par value $0.01 per share (TierOne Common
Stock), will be converted into the right to receive the following (collectively, the
Merger Consideration):

| |  | $6.80
in cash; plus
| | - | -------------------

| |  | 0.675
shares of CapitalSource common stock; plus
| | - | ------------------------------------------------

| |  | if
the ten-day average closing price of CapitalSource common stock prior to the closing of
the Merger is:
| | - | ---------------------------------------------------------------------------------------------------------

| | (a) | less
than or equal to $25.1852, then 0.405 shares of CapitalSource common stock;
               or
| | --- | --------------------------------------------------------------------------------------------------

| | (b) | greater
than $25.1852, then TierOne Corporation stockholders can elect to                receive
either $10.20 in cash or $10.20 of CapitalSource common stock.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company and CapitalSource have made customary representations, warranties and covenants in
the Merger Agreement, including, among others, covenants regarding the conduct of their
businesses and other activities between the execution of the Merger Agreement and the
consummation of the Merger, and have agreed to use their reasonable best efforts to
consummate the Merger. In addition, the Company has made certain additional covenants,
including covenants to cause a stockholder meeting to be held to consider approval of the
Merger and for the Companys Board of Directors to, subject to certain exceptions,
recommend adoption by its stockholders of the Merger Agreement. Furthermore, the Company
is not permitted to solicit or facilitate proposals relating to alternative business
combination transactions, or, subject to certain exceptions, enter into discussions
concerning alternative business combination transactions.

If,
on the day the last governmental approval to complete the Merger is obtained, the
ten-day average closing price of CapitalSource common stock is less than $21.98 and the
trading price of CapitalSource common stock has underperformed by more than 15% the
S&P 500 Financial Sector Index during the period from May 17, 2007 to that date, then
the Board of Directors of the Company intends, in accordance with the terms of the Merger
Agreement, to request that CapitalSource provide additional Merger consideration, either
in stock or cash. The Company has informed CapitalSource that, in such circumstances, its
Board of Directors would intend to make such a request. If, following such a request, the parties are
unable to agree on such additional consideration, then the Board of Directors of the
Company would have the right to terminate the Merger Agreement. The Merger Agreement also
contains other termination rights for both the Company and CapitalSource. Upon termination
of the Merger Agreement, under specified circumstances, CapitalSource may be required to
pay the Company a termination fee of $40.0 million or, under other specified
circumstances, the Company may be required to pay CapitalSource a termination fee of $24.0
million. The Merger Agreement also calls for a limited reimbursement of the other
partys expenses under certain circumstances.

9

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

Consummation
of the Merger is subject to customary conditions, including, without limitation, the
accuracy of the representations and warranties of the parties (subject generally to a
material adverse effect standard), regulatory approval and Company stockholder approval.
On June 29, 2007, CapitalSource filed a Form H-(e)1 Application for the Acquisition
of TierOne Bank by the Merger of TierOne Corporation into CapitalSource TRS Inc.
with the Office of Thrift Supervision (OTS).
CapitalSource has responded to OTS inquiries requesting additional information related to the
filed application. At the date of the filing of this Quarterly Report
on Form 10-Q, the OTS had not yet deemed the application complete or approved.

On
July 13, 2007 CapitalSource filed a joint preliminary proxy statement / prospectus
relating to the merger on Form S-4 with the SEC. On October 26, 2007, CapitalSource filed
a joint definitive proxy statement / prospectus with the SEC on Form S-4 which established
October 17, 2007 as the stockholder record date and set November 29, 2007 as the date for
the Companys special meeting of stockholders to vote on the Merger. Concurrent with
the October 26, 2007 filing, the Company began mailing the proxy statement / prospectus
and associated voting materials to Company stockholders. Subject to timely receipt of both
regulatory and stockholder approval, the Merger is expected to close  either in the fourth quarter
of 2007 or the first quarter of 2008.

In
addition to other factors affecting the Companys financial performance discussed
elsewhere in this Quarterly Report on Form 10-Q, due to the proposed merger with
CapitalSource, the Company has experienced restrictions in certain funding opportunities;
certain one-time merger related expenses; an increased commitment of time by Company
personnel working with federal regulatory agencies in connection with merger-related
issues; and restrictions in the Companys ability to repurchase its common stock.
These activities have and may continue to further impact the Companys financial
performance and earnings per share.

10

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 3  Critical
Accounting Policies

Various
elements of our accounting policies, by nature, are inherently subject to estimation
techniques, valuation assumptions and other subjective assessments. Our policies with
respect to the methodologies used to recognize income, determine the allowance for loan
losses, evaluating investment and mortgage-backed securities for impairment, evaluating
goodwill and other intangible assets, valuation of mortgage servicing rights, valuation
and measurement of derivatives and commitments, valuation of real estate owned and income
taxes are our most critical accounting policies. These policies are important to the
presentation of our financial condition and results of operations, involve a higher degree
of complexity and require management to make difficult and subjective judgments which
often require assumptions or estimates about highly uncertain matters. The use of
different judgments, assumptions and estimates could result in material differences in our
reported financial condition and results of operations. The following discussion regarding
our critical accounting policies should be read in conjunction with our 2006 Annual Report
on Form 10-K.

Allowance
for Loan Losses. We have identified the allowance for loan losses as a
critical accounting policy where amounts are subject to material variation. This policy is
significantly affected by our judgment and uncertainties and there is a likelihood that
materially different amounts could be reported under different, but reasonably plausible,
conditions or assumptions. The allowance for loan losses is considered a critical
accounting estimate because there is a large degree of judgment in:

| |  | Assigning
individual loans to specific risk levels (pass, special mention, substandard, doubtful
and loss);
| | - | -----------------------------------------------------------------------------------------------------------

| |  | Valuing
the underlying collateral securing the loans;
| | - | -----------------------------------------------------

| |  | Determining
the appropriate reserve factor to be applied to specific risk levels for special mention
loans and those adversely classified (substandard, doubtful and loss); and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Determining
reserve factors to be applied to pass loans based upon loan type.
| | - | -----------------------------------------------------------------------------

We
establish provisions for loan losses, which are charges to our operating results, in order
to maintain a level of total allowance for loan losses that, in managements belief,
covers all known and inherent losses that are both probable and reasonably estimable at
each reporting date. Management reviews the loan portfolio no less frequently than
quarterly in order to identify those inherent losses and to assess the overall collection
probability of the loan portfolio. Managements review includes a quantitative
analysis by loan category, using historical loss experience, classifying loans pursuant to
a grading system and consideration of a series of qualitative loss factors. The evaluation
process includes, among other things:

| |  | Assigning
individual loans to specific risk levels (pass, special mention, substandard, doubtful
and loss);
| | - | -----------------------------------------------------------------------------------------------------------

| |  | Trends
and levels of delinquent, nonperforming or impaired loans;
| | - | -------------------------------------------------------------------

| |  | Trends
and levels of charge-offs and recoveries;
| | - | ------------------------------------------------

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

| |  | Underwriting
terms or guarantees for loans;
| | - | -------------------------------------------

| |  | Impact
of changes in underwriting standards, risk tolerances or other changes in lending
practices;
| | - | ---------------------------------------------------------------------------------------------------

| |  | Changes
in the value of collateral securing loans;
| | - | --------------------------------------------------

| |  | Total
loans outstanding and the volume of loan originations;
| | - | ------------------------------------------------------------

| |  | Type,
size, terms and geographic concentration of loans held;
| | - | -------------------------------------------------------------

| |  | Changes
in qualifications or experience of the lending staff;
| | - | -------------------------------------------------------------

| |  | Changes
in local or national economic or industry conditions;
| | - | -------------------------------------------------------------

| |  | Number
of loans requiring heightened management oversight;
| | - | ----------------------------------------------------------

| |  | Changes
in credit concentration; and
| | - | ------------------------------------

| |  | Changes
in regulatory requirements.
| | - | -----------------------------------

This
evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available or as future events occur.

The
allowance for loan losses has two elements. The first element is an allocated allowance
established for specific loans identified by the credit review function that are evaluated
individually for impairment and are considered to be impaired. A loan is considered
impaired when, based on current information and events, it is probable that we will be
unable to collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Impairment is measured by:

| |  | The
fair value of the collateral if the loan is collateral dependent;
| | - | ---------------------------------------------------------------------

| |  | The
present value of expected future cash flows; or
| | - | ---------------------------------------------------

| |  | The
loans observable market price.
| | - | -----------------------------------

The second element is an estimated
allowance established for losses which are probable and reasonable to estimate on each
category of outstanding loans. While management uses available information to recognize
probable losses on loans inherent in the portfolio, future additions to the allowance may
be necessary based on changes in economic conditions and other factors. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review our allowance for loan losses. Such agencies may require us to
recognize additions to the allowance based on their judgment of information available to
them at the time of their examination.

Mortgage
Servicing Rights. On January 1, 2007 we adopted Statement of Financial
Accounting Standard (SFAS) No. 156, Accounting for Servicing of Financial
Assets  an Amendment of FASB Statement No. 140(SFAS No. 156). In
accordance with SFAS No. 156, we have elected to continue to utilize the amortization
method for all of our mortgage servicing right assets, thus, carrying our mortgage
servicing rights at the lower of cost or market (fair value). Under the
amortization method, we amortize mortgage servicing rights in proportion to and over the
period of net servicing income. Income generated as a result of new servicing assets is
reported as net gain on sale of loans held for sale in the Consolidated Statements of
Income. Loan servicing fees, net of amortization of mortgage servicing rights, is recorded
in fees and service charges in the Consolidated Statements of Income.

12

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

We
capitalize the estimated value of mortgage servicing rights upon the sale of loans. The
estimated value takes into consideration contractually known amounts, such as loan
balance, term and interest rate. These estimates are impacted by loan prepayment speeds,
servicing costs and discount rates used to compute a present value of the cash flow
stream. We evaluate the fair value of mortgage servicing rights on a quarterly basis using
current prepayment speed, cash flow and discount rate estimates. Changes in these
estimates impact fair value and could require us to record a valuation allowance or
recovery. The fair value of mortgage servicing rights is highly sensitive to changes in
assumptions. Changes in prepayment speed assumptions have the most significant impact on
the fair value of mortgage servicing rights. Generally, as interest rates decline,
prepayments accelerate with increased refinance activity, which results in a decrease in
the fair value of mortgage servicing rights. As interest rates rise, prepayments generally
slow, which results in an increase in the fair value of mortgage servicing rights. All
assumptions are reviewed for reasonableness on a quarterly basis and adjusted as necessary
to reflect current and anticipated market conditions. Thus, any measurement of fair value
is limited by the conditions existing and the assumptions utilized as of a particular
point in time, and those assumptions may not be appropriate if applied at a different
point in time. We currently do not utilize direct financial hedges to mitigate the effect
of changes in the fair value of our mortgage servicing rights.

Income
Taxes. We estimate income taxes payable based on the amount we expect to
owe various tax authorities. Accrued income taxes represent the net estimated amount due
to, or to be received from, taxing authorities. In estimating accrued income taxes, we
assess the relative merits and risks of the appropriate tax treatment of transactions,
taking into account the applicable statutory, judicial and regulatory guidance in the
context of our tax position. Although we utilize current information to record income
taxes, underlying assumptions may change over time as a result of unanticipated events or
circumstances.

We
utilize estimates of future earnings to support our position that the benefit of our
deferred tax assets will be realized. If future pre-tax income should prove nonexistent or
less than the amount of temporary differences giving rise to the net deferred tax assets
within the tax years to which they may be applied, the assets will not be realized and our
net income will be adversely affected.

13

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 4  Earnings
Per Share

Basic
earnings per share (EPS) is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other contracts to
issue common stock were exercised. Diluted earnings per share is computed after giving
consideration to the weighted average dilutive effect of our 2003 Stock Option Plan shares
and 2003 Management Recognition and Retention Plan shares. The following table is a
reconciliation of basic and diluted EPS:

|                                                       | For the Three Months Ended September 30,
|------------------------------------------------------ | ----------------------------------------
|
|
|Net income (loss)                                      |                                         
|                                                      
|Total weighted average basic common shares outstanding |                                         
|Effect of dilutive securities:                         |                                         
|2003 Stock Option Plan                                 |                                         
|2003 Management Recognition and Retention Plan         |                                         
|                                                      
|Total weighted average basic and diluted               |                                         
|common shares outstanding                              |                                         
|                                                      
|Net income (loss) per common share                     |                                         
|                                                      

|                                                       | For the Nine Months Ended September 30,
|------------------------------------------------------ | ---------------------------------------
|
|
|Net income                                             |                                        
|                                                      
|Total weighted average basic common shares outstanding |                                        
|Effect of dilutive securities:                         |                                        
|2003 Stock Option Plan                                 |                                        
|2003 Management Recognition and Retention Plan         |                                        
|                                                      
|Total weighted average basic and diluted               |                                        
|common shares outstanding                              |                                        
|                                                      
|Net earnings per common share                          |                                        
|                                                      

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 5 
Stock-Based Benefit Plans

General.          We
account for our stock-based benefit plans using SFAS No. 123(R), Share-Based Payment (SFAS
No. 123(R)). SFAS No. 123(R)           requires that compensation expense related
to stock-based payment transactions           be recognized in the financial statements
and that expense be measured based on           the fair value of the equity or liability
instrument issued. SFAS No. 123(R)           also requires that forfeitures be estimated
over the vesting period of the           instrument.

Stock-Based
Employee Compensation Expense. Amounts recognized in the financial
statements with respect to our Employee Stock Ownership Plan (ESOP) and
stock-based employee compensation plans are presented in the following table:

|                                                  | Three Months Ended September 30, | Nine Months Ended September 30,
|------------------------------------------------- | -------------------------------- | -------------------------------
|
|Stock-based employee compensation expense:        |                                  |                                
|Employee Stock Ownership Plan expense             |                                  |                                
|Management Recognition and Retention Plan expense |                                  |                                
|2003 Stock Option Plan expense                    |                                  |                                
|                                                 
|Amount of stock-based compensation expense,       |                                  |                                
|before income tax benefit                         |                                  |                                
|                                                 
|Amount of related income tax benefit recognized   |                                  |                                
|                                                 

Employee
Stock Ownership Plan.Concurrent with the conversion from mutual to stock
ownership, we established an ESOP for the benefit of our employees. The ESOP is a
qualified pension plan under Internal Revenue Service guidelines that covers all full-time
employees who have completed 1,000 hours of service. Upon formation, the ESOP
purchased 1,806,006 shares of common stock issued in the initial public offering with the
proceeds of an $18,060,060 loan from the Company.

We
account for our ESOP in accordance with Statement of Position 93-6, Employers
Accounting for Employee Stock Ownership Plans. Accordingly, expense is recognized
based on the market value (average stock price) of shares scheduled to be released from
the ESOP trust. The excess fair value of ESOP shares over cost is recorded as compensation
expense but is not deductible for tax purposes. As shares are committed to be released
from collateral, we report compensation expense equal to the average market price of the
shares and the shares become outstanding for EPS computations. Our contributions and
dividends on allocated and unallocated ESOP shares are used to pay down the loan.
Accordingly, we have recorded the obligation with an offsetting amount of unearned
compensation in stockholders equity in the accompanying Consolidated Statements of
Financial Condition.

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

|                                                               | At or for the
Three Months Ended
September 30, | At or for the
Nine Months Ended
September 30,
|-------------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------------
|
|Employee Stock Ownership Plan compensation expense             |                                                |                                              
|Employee Stock Ownership Plan shares allocated to employees    |                                                |                                              
|Employee Stock Ownership Plan shares unallocated               |                                                |                                              
|Fair value of Employee Stock Ownership Plan unallocated shares |                                                |                                              
|                                                              

Management
Recognition and Retention Plan. We established a stock-based incentive plan referred to as the 2003 Management Recognition and
Retention Plan (MRRP). The shares
awarded by the MRRP vest to participants at the rate of 20% per year. Compensation expense
for this plan is being recorded over a 60-month period, using the straight-line
amortization method adjusted for forfeitures, and is based on the market value of our
stock as of the date the awards were made. Stockholders approved 903,003 shares to be
granted under the MRRP and 100,653 shares are still available for future grants as of
September 30, 2007. There were no MRRP shares granted, vested or forfeited during either
of the three months ended September 30, 2007 and 2006. The following table summarizes
shares of our common stock that were subject to award and have been granted pursuant to
the MRRP as of September 30, 2007:

|                                                    | At or for the Nine Months Ended
September 30,
|--------------------------------------------------- | ---------------------------------------------
|
|Nonvested shares outstanding at beginning of period |                                              
|Shares granted                                      |                                              
|Shares vested                                       |                                              
|Shares forfeited                                    |                                              
|                                                   
|Nonvested shares outstanding at end of period       |                                              
|                                                   

Compensation
expense related to the MRRP totaled $726,000 for each of the three months ended September
30, 2007 and 2006 and $2.2 million for each of the nine month periods ended September 30,
2007 and 2006. The weighted average grant date fair value of outstanding shares awarded by
the MRRP was $18.64 and $18.38 at September 30, 2007 and 2006, respectively. As of
September 30, 2007, we had $1.9 million of total unrecognized employee compensation
expense related to unvested MRRP shares which are expected to be recognized over a
weighted average period of 11 months. We realized excess tax benefits related to MRRP
shares of $5,000 and $378,000 during the three and nine months ended September 30, 2007,
respectively.

16

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

Stock
Option Plan. We established the 2003 Stock Option Plan (SOP)
under which 2,257,508 shares of our common stock were reserved for the grant of stock
options to directors, officers and employees. Stock options awarded under the SOP vest to
participants at the rate of 20% per year. Compensation expense for this plan is being
recorded over a 60-month period, using the straight-line amortization method adjusted for
forfeitures, and is based on the fair value of our stock options as of the date the awards
were made. The exercise price of the options is equal to the market price of the common
stock on the grant date. Stockholders approved 2,257,508 stock options to be granted under
the SOP and 359,758 of these stock options remain available for future grants as of
September 30, 2007.

The
fair value of each option was estimated on the date of the grant using the Black-Scholes
model. The dividend yield was calculated based on the annual dividends paid and the
12-month average closing stock price at the time of the grant. Expected volatility was
based on historical volatility of our stock price at the date of grant. We have utilized
historical experience to determine the expected life of the stock options and to estimate
future forfeitures. All inputs into the Black-Scholes model are estimates at the time of
the grant. Actual results in the future could materially differ from these estimates;
however, such results would not impact future reported net income.

17

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

Stock
Option Activity. The following table details stock options granted,
exercised and forfeited during the three months ended September 30, 2007:

|(Dollars in thousands, except per share data)   | Number of Shares | Weighted Average Exercise Price | Weighted AverageRemainingContractual Term(In Years) | Aggregate IntrinsicValue
|----------------------------------------------- | ---------------- | ------------------------------- | --------------------------------------------------- | ------------------------
|Stock options outstanding at June 30, 2007      |                  |                                 |                                                     | 1,798,226               
|Stock options granted                           |                  |                                 |                                                     | --                      
|Stock options exercised                         |                  |                                 |                                                     | --                      
|Stock options forfeited                         |                  |                                 |                                                     | --                      
|                                               
|Stock options outstanding at September 30, 2007 |                  |                                 |                                                     | 1,798,226               
|                                               
|Stock options exercisable at September 30, 2007 |                  |                                 |                                                     | 1,410,676               
|                                               

The
following table details stock options granted, exercised and forfeited during the nine
months ended September 30, 2007:

|(Dollars in thousands, except per share data)   | Number of Shares | Weighted Average Exercise Price | Weighted AverageRemainingContractual Term(In Years) | Aggregate IntrinsicValue
|----------------------------------------------- | ---------------- | ------------------------------- | --------------------------------------------------- | ------------------------
|Stock options outstanding at December 31, 2006  |                  |                                 |                                                     | 1,818,626               
|Stock options granted                           |                  |                                 |                                                     | --                      
|Stock options exercised                         |                  |                                 |                                                     | (19,900                 
|Stock options forfeited                         |                  |                                 |                                                     | (500                    
|                                               
|Stock options outstanding at September 30, 2007 |                  |                                 |                                                     | 1,798,226               
|                                               
|Stock options exercisable at September 30, 2007 |                  |                                 |                                                     | 1,410,676               
|                                               

The
following table details stock options granted, exercised and forfeited during the three
months ended September 30, 2006:

|(Dollars in thousands, except per share data)   | Number of Shares | Weighted Average Exercise Price | Weighted AverageRemainingContractual Term(In Years) | Aggregate IntrinsicValue
|----------------------------------------------- | ---------------- | ------------------------------- | --------------------------------------------------- | ------------------------
|Stock options outstanding at June 30, 2006      |                  |                                 |                                                     | 1,850,350               
|Stock options granted                           |                  |                                 |                                                     | --                      
|Stock options exercised                         |                  |                                 |                                                     | (31,724                 
|Stock options forfeited                         |                  |                                 |                                                     | --                      
|                                               
|Stock options outstanding at September 30, 2006 |                  |                                 |                                                     | 1,818,626               
|                                               
|Stock options exercisable at September 30, 2006 |                  |                                 |                                                     | 1,056,526               
|                                               

18

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

The
following table details stock options granted, exercised and forfeited during the nine
months ended September 30, 2006:

|(Dollars in thousands, except per share data)   | Number of Shares | Weighted Average Exercise Price | Weighted AverageRemainingContractual Term(In Years) | Aggregate IntrinsicValue
|----------------------------------------------- | ---------------- | ------------------------------- | --------------------------------------------------- | ------------------------
|Stock options outstanding at December 31, 2005  |                  |                                 |                                                     | 1,864,750               
|Stock options granted                           |                  |                                 |                                                     | --                      
|Stock options exercised                         |                  |                                 |                                                     | (43,624                 
|Stock options forfeited                         |                  |                                 |                                                     | (2,500                  
|                                               
|Stock options outstanding at September 30, 2006 |                  |                                 |                                                     | 1,818,626               
|                                               
|Stock options exercisable at September 30, 2006 |                  |                                 |                                                     | 1,056,526               
|                                               

The
following table details the intrinsic value, cash received and tax benefit realized from
the exercise of stock options during the three and nine months ended September 30, 2007
and 2006:

|                                     | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------------ | -------------------------------- | -------------------------------
|
|Intrinsic value (market value on the |                                  |                                
|exercise date less the strike price) |                                  |                                
|Cash received from the exercise of   |                                  |                                
|stock options                        |                                  |                                
|Tax benefit realized from the        |                                  |                                
|exercise of stock options            |                                  |                                
|                                    

At
September 30, 2007, there was $1.0 million of total unrecognized compensation expense
related to unvested stock options that will be expensed over a weighted average period of
nine months.

19

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 6  Goodwill
and Other Intangible Assets

Goodwill.          Goodwill
represents the excess price paid over the fair value of the tangible           and
intangible assets and liabilities acquired in connection with the           acquisition
of United Nebraska Financial Co. (UNFC) in 2004. There           was no
goodwill recorded in connection with our Marine Bank branch purchase in           2006.
We evaluate goodwill for impairment annually in accordance with SFAS No.           142,
Goodwill and Other Intangible Assets. There have been no changes in           the
carrying amount of goodwill during the nine months ended September 30, 2007           due
to impairment as we are not aware of any facts or circumstances that would
          indicate our carrying value exceeded fair value. The changes in the carrying
          amount of goodwill for the three and nine months ended September 30, 2007 and
          2006 are as follows:

|                                                         | Three Months Ended
September 30, | Nine Months Ended
September 30,
|-------------------------------------------------------- | -------------------------------- | -------------------------------
|
|Balance at beginning of period                           |                                  |                                
|Realized tax benefit associated with United Nebraska     |                                  |                                
|Financial Co. acquisition                                |                                  |                                
|Adjustment due to adoption of FASB Interpretation No. 48 |                                  |                                
|                                                        
|Balance at end of period                                 |                                  |                                
|                                                        

Other
Intangible Assets. Our only identifiable other intangible asset is the
value of core deposits acquired as part of the UNFC and Marine Bank transactions. The core
deposit intangible assets have been estimated to have nine- to ten-year lives. Core
deposit intangible assets are amortized using an accelerated method of amortization which
is recorded in other operating expense.

Other
Intangible Asset Activity. The changes in the carrying amount of acquired
intangible assets for the three and nine months ended September 30, 2007 and 2006 are as
follows:

|                               | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------ | -------------------------------- | -------------------------------
|
|Balance at beginning of period |                                  |                                
|Additions                      |                                  |                                
|Amortization expense           |                                  |                                
|                              
|Balance at end of period       |                                  |                                
|                              

20

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

Other
Intangible Asset Estimated Amortization. Estimated amortization expense
related to our core deposit intangible assets for the year ending December 31, 2007 and
the five years thereafter are as follows:

|(Dollars in thousands)        
|------------------------------
|Estimated Amortization Expense
|For the Year Ending:          
|December 31, 2007             
|December 31, 2008             
|December 31, 2009             
|December 31, 2010             
|December 31, 2011             
|December 31, 2012             
|                              

21

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 7  Investment
and Mortgage-Backed Securities

Investment Security Composition.  The amortized cost, gross unrealized gains
and losses and fair value of investment and mortgage-backed securities by major security
category at September 30, 2007 and December 31, 2006 are as follows:

|                                                  | September 30, 2007
|------------------------------------------------- | ------------------
|
|
|Held to maturity:                                 |                   
|Municipal obligations                             |                   
|                                                 
|Available for sale:                               |                   
|Mortgage-backed securities                        |                   
|U.S. Government securities and agency obligations |                   
|Corporate securities                              |                   
|Municipal obligations                             |                   
|Agency equity securities                          |                   
|Asset Management Fund - ARM Fund                  |                   
|                                                 
|Total investment and mortgage-backed              |                   
|securities, available for sale                    |                   
|                                                 

|                                                  | December 31, 2006
|------------------------------------------------- | -----------------
|
|
|Held to maturity:                                 |                  
|Municipal obligations                             |                  
|                                                 
|Available for sale:                               |                  
|Mortgage-backed securities                        |                  
|U.S. Government securities and agency obligations |                  
|Corporate securities                              |                  
|Municipal obligations                             |                  
|Agency equity securities                          |                  
|Asset Management Fund - ARM Fund                  |                  
|                                                 
|Total investment and mortgage-backed              |                  
|securities, available for sale                    |                  
|                                                 

We
believe all unrealized losses as of September 30, 2007 to be market related, with no
permanent sector or issuer credit concerns or impairments. We had 80 securities with
unrealized losses totaling $512,000 for 12 consecutive months or longer as of September
30, 2007. The unrealized losses are believed to be temporarily, not permanently, impaired
in value. Impairment is deemed temporary if the positive evidence indicating that an
investments carrying amount is recoverable within a reasonable time period outweighs
negative evidence to the contrary. At September 30, 2007, we have the ability and intent
to hold these securities until maturity.

22

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 8  Loans
Receivable

Loan
Portfolio Composition.  Loans receivable at September 30, 2007 and December 31, 2006 are
summarized in the following table:

|                                                                                                    | September 30, 2007 | December 31, 2006
|--------------------------------------------------------------------------------------------------- | ------------------ | -----------------
|
|Real estate loans:                                                                                  |                    |                  
|One-to-four family residential (1)                                                                  |                    |                  
|Second mortgage residential                                                                         |                    |                  
|Multi-family residential                                                                            |                    |                  
|Commercial real estate                                                                              |                    |                  
|Land and land development                                                                           |                    |                  
|Residential construction                                                                            |                    |                  
|Commercial construction                                                                             |                    |                  
|Agriculture                                                                                         |                    |                  
|                                                                                                   
|Total real estate loans                                                                             |                    |                  
|                                                                                                   
|Business                                                                                            |                    |                  
|                                                                                                   
|Agriculture - operating                                                                             |                    |                  
|                                                                                                   
|Warehouse mortgage lines of credit                                                                  |                    |                  
|                                                                                                   
|Consumer loans:                                                                                     |                    |                  
|Home equity                                                                                         |                    |                  
|Home equity lines of credit                                                                         |                    |                  
|Home improvement                                                                                    |                    |                  
|Automobile                                                                                          |                    |                  
|Other                                                                                               |                    |                  
|                                                                                                   
|Total consumer loans                                                                                |                    |                  
|                                                                                                   
|Total loans                                                                                         |                    |                  
|                                                                                                   
|Unamortized premiums, discounts and                                                                 |                    |                  
|deferred loan fees                                                                                  |                    |                  
|Loans in process (2)                                                                                |                    |                  
|                                                                                                   
|Net loans                                                                                           |                    |                  
|Allowance for loan losses                                                                           |                    |                  
|                                                                                                   
|Net loans after allowance for loan losses                                                           |                    |                  
|                                                                                                   
|(1) Includes loans held for sale                                                                    |                    |                  
|                                                                                                   
|(2) Loans in process represents the undisbursed portion of construction and land development loans.
|                                                                                                   

23

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TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

Primary
Lending Market Area.Our primary lending market area consists of Nebraska,
Iowa, Kansas, Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. Our
Asset/Liability and Asset Classification Committees are responsible for setting guidelines
related to loan concentrations and monitoring such concentrations to limit potential loss
exposure. At September 30, 2007 and December 31, 2006, approximately 18.6% and 20.8%,
respectively, of total loans were secured by properties or made to individuals located
outside of our primary lending market area.

Allowance
for Loan Losses.The activity in the allowance for loan losses during the three
and nine months ended September 30, 2007 and 2006 is summarized in the following table:

|                                                 | At or for the Three Months Ended
September 30, | At or for the Nine Months Ended
September 30,
|------------------------------------------------ | ---------------------------------------------- | ---------------------------------------------
|
|Allowance for loan losses at beginning of period |                                                |                                              
|Charge-offs:                                     |                                                |                                              
|One-to-four family residential                   |                                                |                                              
|Second mortgage residential                      |                                                |                                              
|Land and land development                        |                                                |                                              
|Commercial real estate                           |                                                |                                              
|Residential construction                         |                                                |                                              
|Business                                         |                                                |                                              
|Agriculture - operating                          |                                                |                                              
|Consumer                                         |                                                |                                              
|                                                
|Total charge-offs                                |                                                |                                              
|Recoveries on loans previously charged-off       |                                                |                                              
|Provision for loan losses                        |                                                |                                              
|                                                
|Allowance for loan losses at end of period       |                                                |                                              
|                                                
|Allowance for loan losses as a percentage        |                                                |                                              
|of net loans                                     |                                                |                                              
|Allowance for loan losses as a percentage of     |                                                |                                              
|nonperforming loans                              |                                                |                                              
|Ratio of net charge-offs during the period as a  |                                                |                                              
|percentage of average loans outstanding          |                                                |                                              
|during the period                                |                                                |                                              
|                                                

24

---

TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

Nonperforming
Assets.The following table sets forth information regarding nonperforming loans
(90 or more days delinquent) and real estate owned. It is our policy to cease accruing
interest on loans contractually delinquent 90 days or more and charge-off all accrued
interest. We did not have any accruing loans 90 days or more past due at the dates shown.

|(Dollars in thousands)                                                                      | September 30, 2007 | December 31, 2006
|------------------------------------------------------------------------------------------- | ------------------ | -----------------
|Nonperforming loans:                                                                        |                    |                  
|One-to-four family residential                                                              |                    |                  
|Second mortgage residential                                                                 |                    |                  
|Multi-family residential                                                                    |                    |                  
|Commercial real estate                                                                      |                    |                  
|Land and land development                                                                   |                    |                  
|Residential construction                                                                    |                    |                  
|Agriculture - real estate                                                                   |                    |                  
|Business                                                                                    |                    |                  
|Agriculture - operating                                                                     |                    |                  
|Consumer                                                                                    |                    |                  
|                                                                                           
|Total nonperforming loans                                                                   |                    |                  
|Real estate owned, net (1)                                                                  |                    |                  
|                                                                                           
|Total nonperforming assets                                                                  |                    |                  
|Troubled debt restructurings                                                                |                    |                  
|                                                                                           
|Total nonperforming assets and troubled debt restructurings                                 |                    |                  
|                                                                                           
|Total nonperforming loans as a percentage of net loans                                      |                    |                  
|                                                                                           
|Total nonperforming assets as a percentage of total assets                                  |                    |                  
|                                                                                           
|Total nonperforming assets and troubled debt restructurings                                 |                    |                  
|as a percentage of total assets                                                             |                    |                  
|                                                                                           
|Allowance for loan losses as a percentage of net loans                                      |                    |                  
|                                                                                           
|Allowance for loan losses as a percentage of nonperforming loans                            |                    |                  
|                                                                                           
|(1) Real estate owned balances are shown net of related loss allowances. Includes both real
|property and other repossessed collateral consisting primarily of automobiles.             
|                                                                                           

Our
provision for loan losses for the three months ended September 30, 2007 was $17.5 million
compared to $1.1 million for the three months ended September 30, 2006. At September 30,
2007, our allowance for loan losses had increased 77.5% to $58.8 million compared to $33.1
million at December 31, 2006. Included in the $58.8 million allowance for loan losses, we
have established an allowance for loan losses of $21.8 million relating to impaired loans.
Total impaired loans consist primarily of $47.5 million of residential construction loans,
$8.0 million of land development loans and $4.1 million of commercial real estate loans of
which $4.0 million of the impaired commercial real estate loans are performing. Actual
losses are dependent upon future events and, as such, further changes to the level of
allowance for loan losses may become necessary based on changes in economic conditions and
other factors.

25

---

TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

At
September 30, 2007, our nonperforming residential construction loans totaled $56.3
million of which $46.7 million were located in Florida. Approximately $45.1 million of
our total nonperforming residential construction loans had been purchased from TransLand
with $38.9 million of these loans located in the Cape Coral area of Lee County, Florida.

To
limit our geographic loan concentration, we discontinued purchasing residential
construction loans in the Cape Coral area from TransLand by
December 31, 2005. We had total loan commitments in the Cape Coral area of $88.4 million,
$100.6 million, $119.9 million and $144.9 million at September 30, 2007, June 30, 2007,
March 31, 2007 and December 31, 2006, respectively. Disbursed funds in the Cape Coral area
totaled $57.7 million, $66.8 million, $72.9 million and $84.2 million at September 30,
2007, June 30, 2007, March 31, 2007 and December 31, 2006, respectively.

In
the Cape Coral area, we had nonperforming residential construction loans totaling $38.9
million, $27.5 million, $19.5 million and $9.4 million at September 30, 2007, June 30,
2007, March 31, 2007 and December 31, 2006, respectively. At September 30, 2007, loans
30-89 days delinquent totaled $6.0 million, compared to $8.9 million, $7.3 million and
$8.8 million at June 30, 2007, March 31, 2007 and December 31, 2006, respectively. During
the nine months ended September 30, 2007 charge-offs in the Cape Coral area totaled
$170,000. Charge-offs against existing reserves may increase in future periods.

At
September 30, 2007, we had classified $47.5 million of our total residential construction
loans as impaired, of which $45.1 million relate to loans purchased from TransLand. We
have established an allowance for loan losses related to the TransLand loans which have
been classified as impaired of $17.4 million. At June 30, 2007, we had classified $28.4
million of our residential construction loans purchased from TransLand as impaired. The
allowance for loan losses related to these loans at June 30, 2007 was $5.7 million.

26

---

TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 9  Mortgage
Servicing Rights

On
January 1, 2007, we adopted SFAS No. 156, Accounting for Servicing of Financial Assets
 an Amendment of FASB Statement No. 140(SFAS No. 156). In
accordance with SFAS No. 156, we have elected to continue to utilize the amortization
method for all of our mortgage servicing right assets, thus, carrying our mortgage
servicing rights at the lower of cost or market (fair value). Under the
amortization method, we amortize mortgage servicing rights in proportion to and over the
period of net servicing income. Income generated as a result of new servicing assets is
reported as net gain on sale of loans in the Consolidated Statements of Income. Loan
servicing fees, net of amortization of mortgage servicing rights, is recorded in fees and
service charges in the Consolidated Statements of Income.

We
primarily service one-to-four family residential mortgage loans that comprise a single
class of servicing assets. We obtain mortgage servicing right assets when we deliver
loans, both originated and purchased, as an agent into the secondary market on
a servicing-retained basis. Initial fair value of the servicing right is calculated by a
discounted cash flow model based on market value assumptions at the time of origination.

The
balance of mortgage servicing rights, net of valuation allowances, at September 30, 2007
and December 31, 2006 was $13.7 million and $12.5 million, respectively. The fair
values of these rights were approximately $18.8 million and $15.3 million at September 30,
2007 and December 31, 2006, respectively. The following are the key assumptions used in
measuring the fair values of capitalized mortgage servicing rights and the sensitivity of
the fair values to changes in those assumptions:

27

---

TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

|(Dollars in thousands)             | September 30, 2007 | December 31, 2006
|---------------------------------- | ------------------ | -----------------
|Serviced loan portfolio balance    | $1,394,826         | $1,295,418       
|Fair value                         | $18,768            | $15,276          
|Prepayment speed                   | 4.40% - 45.09%     | 8.64% - 46.44%   
|Weighted average prepayment speed  | 9.49%              | 14.40%           
|Fair value with 10% adverse change | $18,022            | $14,654          
|Fair value with 20% adverse change | $17,358            | $14,034          
|Discount rate                      | 9.50% - 13.00%     | 10.00% - 14.00%  
|Weighted average discount rate     | 10.67%             | 11.34%           
|Fair value with 10% adverse change | $17,983            | $14,806          
|Fair value with 20% adverse change | $17,273            | $14,325          
|                                  

The
sensitivity of the fair values is hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a variation in assumptions generally
cannot be extrapolated because the relationship of the change in assumptions to the change
in fair value may not be linear. Also, in the table, the effect of a variation in a
particular assumption on the fair value of the mortgage servicing rights is calculated
without changing any other assumption. In reality, changes in one assumption may result in
changes in another that might magnify or counteract the sensitivities.

Mortgage
Servicing Right Activity. The following table summarizes mortgage servicing
right activity including amortization expense:

|                                      | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------------- | -------------------------------- | -------------------------------
|
|Balance at beginning of period        |                                  |                                
|Mortgage servicing rights capitalized |                                  |                                
|Amortization expense                  |                                  |                                
|Valuation adjustment                  |                                  |                                
|                                     
|Balance at end of period              |                                  |                                
|                                     

Mortgage
Servicing Right Valuation Allowance. We evaluate the fair value of mortgage
servicing rights on a quarterly basis using current prepayment speeds, cash flow and
discount rate estimates. Changes in these estimates impact fair value and could require us
to record a valuation allowance or recovery. Our evaluation of mortgage servicing rights
at September 30, 2007 and 2006 indicated that no valuation allowance was necessary. The
amortization expense and valuation adjustment are recorded as a reduction of fees and
service charges in the accompanying Consolidated Statements of Income.

28

---

TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 10  Deposits

Deposit
Composition.  Deposits at September 30, 2007 and December 31, 2006 are summarized
in the following table:

|                                | September 30, 2007 | December 31, 2006
|------------------------------- | ------------------ | -----------------
|
|Transaction accounts:           |                    |                  
|Noninterest-bearing checking    |                    |                  
|Savings                         |                    |                  
|Interest-bearing checking       |                    |                  
|Money market                    |                    |                  
|                               
|Total transaction accounts      |                    |                  
|                               
|Total transaction accounts as a |                    |                  
|percentage of total deposits    |                    |                  
|                               
|Time deposits:                  |                    |                  
|1.00% to 1.99%                  |                    |                  
|2.00% to 2.99%                  |                    |                  
|3.00% to 3.99%                  |                    |                  
|4.00% to 4.99%                  |                    |                  
|5.00% to 5.99%                  |                    |                  
|6.00% to 6.99%                  |                    |                  
|                               
|Total time deposits             |                    |                  
|                               
|Total time deposits as a        |                    |                  
|percentage of total deposits    |                    |                  
|                               
|Total deposits                  |                    |                  
|                               

Time
Deposit Maturity.  The scheduled maturities of time deposits at September 30,
2007 are presented in the following table:

|(Dollars in thousands)                       | Amount | Percent
|-------------------------------------------- | ------ | -------
|Amount Maturing During the 12 Months Ending: |        |        
|September 30, 2008                           |        |        
|September 30, 2009                           |        |        
|September 30, 2010                           |        |        
|September 30, 2011                           |        |        
|September 30, 2012                           |        |        
|Thereafter                                   |        |        
|                                            
|Total time deposits                          |        |        
|                                            

29

---

TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

Time
Deposits of $100,000 or More.The following table shows the maturities of
our time deposits of $100,000 or more at September 30, 2007 by the time remaining to
maturity. We did not have any brokered time deposits at September 30, 2007.

|(Dollars in thousands)                    | Amount | Weighted Average Rate
|----------------------------------------- | ------ | ---------------------
|Amount Maturing During the Quarter Ended: |        |                      
|December 31, 2007                         |        |                      
|March 31, 2008                            |        |                      
|June 30, 2008                             |        |                      
|September 30, 2008                        |        |                      
|Thereafter                                |        |                      
|                                         
|Total time deposits of $100,000 or more   |        |                      
|                                         

# Note 11  FHLBank
Topeka Advances and Other Borrowings

At
September 30, 2007 and December 31, 2006, we were indebted on notes as shown in the
following table:

|(Dollars in thousands)                  | September 30, 2007 | December 31, 2006
|--------------------------------------- | ------------------ | -----------------
|Permanent fixed-rate notes payable to   |                    |                  
|the FHLBank Topeka                      |                    |                  
|Convertible fixed-rate notes payable to |                    |                  
|the FHLBank Topeka                      |                    |                  
|Line of credit with the FHLBank Topeka  |                    |                  
|Retail repurchase agreements            |                    |                  
|Junior subordinated debentures          |                    |                  
|                                       
|Total FHLBank Topeka advances and       |                    |                  
|other borrowings                        |                    |                  
|                                       
|Weighted average interest rate          |                    |                  
|                                       

The
convertible fixed-rate notes are convertible to adjustable-rate notes at the option of the
FHLBank Topeka (FHLBank). The line of credit with the FHLBank expires in
November 2007. We expect the line of credit agreement to be renewed in the ordinary course
of business due to our current blanket collateral agreement with the FHLBank.

30

---

TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

Pursuant
to our blanket collateral agreement with the FHLBank, such advances are secured by our
qualifying residential, multi-family residential and commercial real estate mortgages,
residential construction, commercial construction and agricultural real estate loans.
Under our blanket collateral agreement with the FHLBank, our borrowing capacity at
September 30, 2007 was $920.4 million. Other qualifying collateral can be pledged in the
event additional borrowing capacity is required.

Our
retail repurchase agreements are primarily collateralized by U.S. Government and agency
and municipal obligations (investment securities).

31

---

TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 12 
Unrecognized Tax Benefits

In
June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires that we
determine whether a tax position is more likely than not to be sustained upon examination,
including resolution of any related appeals or litigation processes, based on the
technical merits of the position. Once it is determined that a position meets the
recognition threshold, the position is measured to determine the amount of benefit to be
recognized in the financial statements.

We
adopted FIN 48 on January 1, 2007 and, as a result, recognized no material adjustment in
our liability for unrecognized tax benefits. Unrecognized tax benefits, excluding interest
and penalties, were $4.6 million at September 30, 2007. Unrecognized tax benefits of
$129,000 and interest and penalties of $402,000 would favorably affect our effective tax
rate if recognized in future periods. Unrecognized tax benefits of $543,000 are related to
our UNFC acquisition and would reduce goodwill if recognized in future periods. The
following table summarizes our unrecognized tax benefits upon adoption and for the nine
months ended September 30, 2007:

|(Dollars in thousands)                                                             | Unrecognized Tax Benefits
|---------------------------------------------------------------------------------- | -------------------------
|Unrecognized tax benefits at January 1, 2007                                       |                          
|Changes in unrecognized tax benefits for the three months ended March 31, 2007     |                          
|Changes in unrecognized tax benefits for the three months ended June 30, 2007      |                          
|Changes in unrecognized tax benefits for the three months ended September 30, 2007 |                          
|Changes in unrecognized tax benefits from settlements with taxing authorities      |                          
|Changes in unrecognized tax benefits from the lapse of statutes of limitations     |                          
|for the three months ended September 30, 2007                                      |                          
|                                                                                  
|Unrecognized tax benefits at September 30, 2007                                    |                          
|                                                                                  

Any
interest and penalties related to uncertain tax positions are recorded in income tax
expense in the Consolidated Statements of Income. At September 30, 2007, we had
approximately $402,000 of accrued interest payable related to uncertain tax positions
recorded in our Consolidated Statements of Financial Position.

We
anticipate that a reduction in unrecognized tax benefits of up to $4.3 million is
reasonably possible during the next 12 months. This reduction will be principally due to a
change in accounting method related to the timing of when certain deferred loan fees are
recognized for tax purposes if approved by the Internal Revenue Service.

The
tax years of 2004 through 2006 remain open for examination by federal and state taxing
authorities.

32

---

TierOne Corporation and
Subsidiaries  Notes to Consolidated Financial Statements  (Unaudited)

# Note 13  Current
Accounting Pronouncements

For
a discussion regarding accounting pronouncements, interpretations, exposure drafts and
other formal accounting guidance and the impact of these on our financial condition and
results of operations, reference is made to our Annual Report on Form 10-K for the year
ended December 31, 2006. The following discussion identifies certain recently issued
accounting guidance.

# Statements of Financial
Accounting Standards

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles and expands disclosure about
fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use in
pricing the asset or liability. This statement clarifies that market participant
assumptions include assumptions about risk. A fair value measurement should include an
adjustment for risk if market participants would include one in pricing the related asset
or liability, even if the adjustment is difficult to determine. This statement also
clarifies that market participant assumptions should also include assumptions about the
effect of a restriction on the sale or use of an asset. This statement clarifies that fair
value measurement for a liability should reflect nonperformance risk (the risk that the
obligation will not be fulfilled). This statement expands disclosures about the use of
fair value to measure assets and liabilities in interim and annual periods subsequent to
initial recognition. The disclosures focus on the inputs used to measure fair value and
for recurring fair value measurements using significant unobservable inputs and the effect
of the measurements on earnings (or changes in net assets) for the period. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15,
2007. We are evaluating the impact that SFAS No. 157 may have on our consolidated
financial statements.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, Including an amendment of FASB Statement No. 115
(SFAS No. 159). SFAS No. 159 provides an alternative measurement treatment for
certain financial assets and liabilities, under an instrument-by-instrument election, that
permits fair value to be used for both initial and subsequent measurement, with changes in
fair value recognized in earnings. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are evaluating the impact that SFAS No. 159 may have on our
consolidated financial statements.

33

---

# Item 2 - Managements
Discussion and Analysis of Financial Condition and Results of      Operations.

# General

TierOne
Bank (Bank), a subsidiary of TierOne Corporation (Company), is a
$3.5 billion federally chartered stock savings bank headquartered in Lincoln, Nebraska.
Established in 1907, the Bank offers customers a wide variety of full-service consumer,
commercial and agricultural banking products and services through a network of 69 banking
offices located in Nebraska, Iowa and Kansas and nine loan production offices located in
Arizona, Colorado, Florida, Minnesota, Nevada and North Carolina. Product offerings
include residential, commercial and agricultural real estate loans; consumer,
construction, business and agricultural operating loans; warehouse mortgage lines of
credit; consumer and business checking and savings plans; investment and insurance
services; and telephone and internet banking.

Our
results of operations are dependent primarily on net interest income, which is the
difference between the interest earned on our assets, primarily our loan and securities
portfolios, and our cost of funds, which consists of the interest paid on our deposits and
borrowings. Our net income is also affected by our provision for loan losses, noninterest
income, noninterest expense and income tax expense. Noninterest income generally includes
fees and service charges, debit card fees, net income from real estate operations, net
gain on sales of investment securities, loans held for sale and real estate owned and
other operating income. Noninterest expense consists of salaries and employee benefits,
occupancy, data processing, advertising and other operating expense. Our earnings are
significantly affected by general economic and competitive conditions, particularly
changes in market interest rates and U.S. Treasury yield curves, governmental policies and
actions of regulatory authorities.

As
used in this report, unless the context otherwise requires, the terms we,
us, or our refer to the Company and the Bank.

34

---

# Recent Developments

On
May 17, 2007, TierOne Corporation, CapitalSource Inc. (CapitalSource) and
CapitalSource TRS Inc. (CapitalSource TRS) entered into and announced an
Agreement and Plan of Merger (Merger Agreement). The Merger Agreement provides
that, upon the terms and subject to conditions set forth in the Merger Agreement, the
Company will merge with and into CapitalSource TRS (Merger), with
CapitalSource TRS continuing as the surviving corporation.

Subject
to the terms and conditions of the Merger Agreement, at the effective time and as a result
of the Merger, each issued and outstanding share of Company common stock (other than
certain shares owned by the Company), par value $0.01 per share (TierOne Common
Stock), will be converted into the right to receive the following (collectively, the
Merger Consideration):

| |  | $6.80
in cash; plus
| | - | -------------------

| |  | 0.675
shares of CapitalSource common stock; plus
| | - | ------------------------------------------------

| |  | if
the ten-day average closing price of CapitalSource common stock prior to the closing of
the Merger is:
| | - | ---------------------------------------------------------------------------------------------------------

| | (a) | less
than or equal to $25.1852, then 0.405 shares of CapitalSource common           stock; or
| | --- | ---------------------------------------------------------------------------------------------

| | (b) | greater
than $25.1852, then TierOne Corporation stockholders can elect to           receive
either $10.20 in cash or $10.20 of CapitalSource common stock.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company and CapitalSource have made customary representations, warranties and covenants in
the Merger Agreement, including, among others, covenants regarding the conduct of their
businesses and other activities between the execution of the Merger Agreement and the
consummation of the Merger, and have agreed to use their reasonable best efforts to
consummate the Merger. In addition, the Company has made certain additional covenants,
including covenants to cause a stockholder meeting to be held to consider approval of the
Merger and for the Companys Board of Directors to, subject to certain exceptions,
recommend adoption by its stockholders of the Merger Agreement. Furthermore, the Company
is not permitted to solicit or facilitate proposals relating to alternative business
combination transactions, or, subject to certain exceptions, enter into discussions
concerning alternative business combination transactions.

If,
on the day  the last governmental approval to complete the Merger is obtained, the
ten-day average closing price of CapitalSource common stock is less than $21.98 and the
trading price of CapitalSource common stock has underperformed by more than 15% the
S&P 500 Financial Sector Index during the period from May 17, 2007 to that date, then
the Board of Directors of the Company intends, in accordance with the terms of the Merger
Agreement, to request that CapitalSource provide additional Merger consideration, either
in stock or cash. The Company has informed CapitalSource that, in such circumstances, its
Board would intend to make such a request. If, following such a request, the parties are
unable to agree on such additional consideration, then the Board of Directors of the
Company would have the right to terminate the Merger Agreement. The Merger Agreement also
contains other termination rights for both the Company and CapitalSource. Upon termination
of the Merger Agreement, under specified circumstances, CapitalSource may be required to
pay the Company a termination fee of $40.0 million or, under other specified
circumstances, the Company may be required to pay CapitalSource a termination fee of $24.0
million. The Merger Agreement also calls for a limited reimbursement of the other
partys expenses under certain circumstances.

35

---

Consummation
of the Merger is subject to customary conditions, including, without limitation, the
accuracy of the representations and warranties of the parties (subject generally to a
material adverse effect standard), regulatory approval and Company stockholder approval.
On June 29, 2007, CapitalSource filed a Form H-(e)1 Application for the Acquisition
of TierOne Bank by the Merger of TierOne Corporation into CapitalSource TRS Inc.
with the Office of Thrift Supervision (OTS).
CapitalSource has responded to OTS inquiries requesting additional information related to the
filed application. At the date of the filing of this Quarterly Report on Form 10-Q, the OTS
had not yet deemed the application complete or approved.

On
July 13, 2007 CapitalSource filed a joint preliminary proxy statement / prospectus
relating to the merger on Form S-4 with the Securities and Exchange Commission (SEC). On October 26, 2007, CapitalSource filed
a joint definitive proxy statement / prospectus with the SEC on Form S-4 which established
October 17, 2007 as the stockholder record date and set November 29, 2007 as the date for
the Companys special meeting of stockholders to vote on the Merger. Concurrent with
the October 26, 2007 filing, the Company began mailing the proxy statement / prospectus
and associated voting materials to Company stockholders. Subject to timely receipt of both
regulatory and stockholder approval, the Merger is expected to close in either the fourth quarter
of 2007 or the first quarter of 2008.

In
addition to other factors affecting the Companys financial performance discussed
elsewhere in this Quarterly Report on Form 10-Q, due to the proposed merger with
CapitalSource, and as reflected in this document, the Company has experienced restrictions
in certain funding opportunities; certain one-time merger related expenses; an increased
commitment of time by Company personnel working with federal regulatory agencies in
connection with merger-related issues; and restrictions in the Companys ability to
repurchase its common stock. These activities have and may continue to further impact the
Companys financial performance and earnings per share.

# Forward-Looking
Statements

Statements
contained in this Quarterly Report on Form 10-Q which are not historical facts may be
forward-looking statements as that term is defined in the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those currently anticipated due
to a number of factors. In addition to the risk factors described in Part 2, Item 1A. of
this Quarterly Report on Form 10-Q, factors that could result in material variations
include, but are not limited to:

| |  | Strength
of the United States economy in general and the strength of the local economies in which
we conduct our operations;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | Changes
in interest rates or other competitive factors which could affect net interest margins,
net interest income and noninterest income;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | Changes
in deposit flows,  and in the demand for deposits,  loans,  investment  products and
other  financial  services in the          markets we serve;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

| |  | Changes
in the quality or composition of our loan portfolio;
| | - | ------------------------------------------------------------

| |  | Changes
in real estate values, which could impact the quality of the assets securing the loans in
our portfolios;
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | Borrower
bankruptcies, claims and assessments;
| | - | ----------------------------------------------

| |  | Unanticipated
issues associated with the execution of our strategic plan, including issues associated
with the growth of a more diversified loan portfolio;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
timely development of new lines of business and competitive products or services within
our existing lines of business in a changing environment, and the acceptance of such
products and services by our customers;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Any
interruption or breach of security resulting in failures or disruption in customer
account management, general ledger, deposit operations, lending or other systems;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Changes
in fiscal, monetary, regulatory, trade and tax policies and laws;
| | - | -------------------------------------------------------------------------

| |  | Increased
competitive challenges and expanding product and pricing pressures among financial
institutions;
| | - | ----------------------------------------------------------------------------------------------------------

| |  | Changes
in accounting policies or procedures as may be required by various regulatory agencies;
| | - | -----------------------------------------------------------------------------------------------

| |  | Changes
in consumer spending and savings habits;
| | - | ------------------------------------------------

| |  | Unanticipated
issues relating to the recovery of insurance proceeds for claims arising out of the Banks
prior relationship with TransLand Financial Services, Inc.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
business and the businesses of  CapitalSource  may not be integrated  successfully or
such  integration may take longer to          accomplish than expected;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Disruption
from the Merger may make it more difficult to maintain customer relationships;
| | - | -----------------------------------------------------------------------------------------

| |  | Conditions
precedent to the Merger may not be satisfied or the Merger Agreement may be terminated
pursuant to its terms;
| | - | ------------------------------------------------------------------------------------------------------------------------

| |  | The
 required  regulatory  approvals  of the Merger may not be obtained or if obtained  may
not be on the  proposed  terms and          schedule;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
stockholders may not approve the Merger; and
| | - | ------------------------------------------------

| |  | Other
factors discussed in documents we may file with the Securities and Exchange Commission
from time to time.
| | - | ---------------------------------------------------------------------------------------------------------------

These
factors should be considered in evaluating the forward-looking statements and undue
reliance should not be placed on such statements. We undertake no obligation, and disclaim
any obligation, to update information contained in this Quarterly Report on Form 10-Q,
including these forward-looking statements, to reflect events or circumstances that occur
after the date of the filing of this Quarterly Report on Form 10-Q.

37

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# Comparison of Financial
Condition at September 30, 2007 and December 31, 2006

# Assets

General.          Our
total assets were $3.5 billion at September 30, 2007, an increase of $111.5
          million, or 3.2%, compared to $3.4 billion at December 31, 2006.

Investment
Securities. Our available for sale investment securities totaled $149.8
million at September 30, 2007, an increase of $44.8 million, or 42.6%, compared to $105.0
million at December 31, 2006. During the nine months ended September 30, 2007 we had
security purchases of $230.3 million which were partially offset by $187.3 million in
proceeds from maturing and sold investment securities. The securities purchased during
2007 were primarily agency obligations that were purchased to collateralize deposits.

Mortgage-Backed
Securities. Our mortgage-backed securities, all of which are recorded as
available for sale, totaled $7.7 million at September 30, 2007, a decrease of $4.6
million, or 37.4%, compared to $12.3 million at December 31, 2006. The decrease in our
mortgage-backed securities was the result of $4.6 million of principal payments received
during the nine months ended September 30, 2007.

38

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Loans
Receivable. Net loans totaled $3.0 billion at September 30, 2007, a
decrease of $29.3 million, or 1.0%, compared to $3.1 billion at December 31, 2006. During
the nine months ended September 30, 2007, we originated $1.2 billion of loans (exclusive
of warehouse mortgage lines of credit) and purchased $328.5 million of loans. These
increases were offset by $1.5 billion of principal repayments and $238.2 million of loan
sales. The following table details the composition of our loan portfolio at the dates
indicated:

|(Dollars in thousands)                                                                              | September 30, 2007 | December 31, 2006 | Increase (Decrease) | % Change 
|--------------------------------------------------------------------------------------------------- | ------------------ | ----------------- | ------------------- | ---------
|One-to-four family residential (1)                                                                  |                    |                   | $                   | 327,442  
|Second mortgage residential                                                                         |                    |                   |                     | 99,478   
|Multi-family residential                                                                            |                    |                   |                     | 110,698  
|Commercial real estate                                                                              |                    |                   |                     | 367,753  
|Land and land development                                                                           |                    |                   |                     | 514,779  
|Residential construction                                                                            |                    |                   |                     | 592,317  
|Commercial construction                                                                             |                    |                   |                     | 562,403  
|Agriculture - real estate                                                                           |                    |                   |                     | 85,716   
|Business                                                                                            |                    |                   |                     | 241,025  
|Agriculture - operating                                                                             |                    |                   |                     | 95,877   
|Warehouse mortgage lines of credit                                                                  |                    |                   |                     | 75,752   
|Consumer                                                                                            |                    |                   |                     | 402,439  
|                                                                                                   
|Total loans                                                                                         |                    |                   |                     | 3,475,679
|                                                                                                   
|Unamortized premiums, discounts                                                                     |                    |                  
|and deferred loan fees                                                                              |                    |                   |                     | 9,034    
|Loans in process (2):                                                                               |                    |                  
|Land and land development                                                                           |                    |                   |                     | (115,977 
|Residential construction                                                                            |                    |                   |                     | (170,535 
|Commercial construction                                                                             |                    |                   |                     | (177,336 
|                                                                                                   
|Net loans                                                                                           |                    |                   | $                   | 3,020,865
|                                                                                                   
|(1) Includes loans held for sale                                                                    |                    |                   | $                   | 20,462   
|                                                                                                   
|(2) Loans in process represents the undisbursed portion of construction and land development loans.
|                                                                                                   

At
September 30, 2007, the outstanding balance (net of loans in process) of our residential
construction loans was $421.8 million, a decrease of $75.8 million, or 15.2%, compared to
$497.6 million at December 31, 2006. The outstanding balance (net of loans in process) of
our commercial construction loans was $385.1 million at September 30, 2007, an increase of
$124.7 million, or 47.9%, compared to $260.4 million at December 31, 2006. The outstanding
balance of our land and land development loans was $398.8 million at September 30, 2007,
an increase of $26.6 million, or 7.1%, compared to $372.2 million at December 31, 2006.

The
decrease in net loans at September 30, 2007 was primarily attributable to loan payoffs
and periodic payments. Additionally, lower demand, more stringent underwriting guidelines
and various lending and other balance sheet restrictions imposed upon us by our Merger
Agreement with CapitalSource have resulted in a decreased volume of residential real
estate related loan originations. The decreased demand and tightened underwriting
standards have resulted from declines in economic conditions in the housing and credit
markets. Commercial construction loan origination volume has not been impacted to the
same degree by the economic conditions affecting the residential housing markets.

39

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We
do not currently originate, nor do we intend to acquire, sub-prime loans.

Allowance
for Loan Losses. Our allowance for loan losses increased $25.7 million, or
77.5%, to $58.8 million at September 30, 2007 compared to $33.1 million at December 31,
2006. During the nine months ended September 30, 2007 we recorded provisions for loan
losses totaling $29.2 million and net charge-offs of $3.5 million. Our allowance for loan
losses as a percentage of nonperforming loans was 75.04% at September 30, 2007 compared to
110.25% at December 31, 2006. Our ratio of the allowance for loan losses to net loans was
1.95% and 1.09% at September 30, 2007 and December 31, 2006, respectively.

Our
provision for loan losses for the three months ended September 30, 2007 was $17.5 million
compared to $1.1 million for the three months ended September 30, 2006. At September 30,
2007, our allowance for loan losses had increased 77.5% to $58.8 million compared to $33.1
million at December 31, 2006. Included in the $58.8 million allowance for loan losses, we
have established an allowance for loan losses of $21.8 million relating to impaired loans.
Total impaired loans consist primarily of $47.5 million of residential construction loans,
$8.0 million of land development loans and $4.1 million of commercial real estate loans of
which $4.0 million of the impaired commercial real estate loans are performing. Actual
losses are dependent upon future events and, as such, further changes to the level of
allowance for loan losses may become necessary based on changes in economic conditions and
other factors.

At
September 30, 2007, our nonperforming residential construction loans totaled $56.3 million
of which $46.7 million were located in Florida. Approximately $45.1 million of our total
nonperforming residential construction loans had been purchased from TransLand Financial
Services, Inc. (TransLand), a Florida mortgage brokerage firm, with $38.9
million of these loans located in the Cape Coral area of Lee County, Florida.

To
limit our geographic loan concentration, we discontinued purchasing residential
construction loans in the Cape Coral area from TransLand by
December 31, 2005. We had total loan commitments in the Cape Coral area of $88.4 million,
$100.6 million, $119.9 million and $144.9 million at September 30, 2007, June 30, 2007,
March 31, 2007 and December 31, 2006, respectively. Disbursed funds in the Cape Coral area
totaled $57.7 million, $66.8 million, $72.9 million and $84.2 million at September 30,
2007, June 30, 2007, March 31, 2007 and December 31, 2006, respectively.

In
the Cape Coral area, we had nonperforming residential construction loans totaling $38.9
million, $27.5 million, $19.5 million and $9.4 million at September 30, 2007, June 30,
2007, March 31, 2007 and December 31, 2006, respectively. At September 30, 2007, loans
30-89 days delinquent totaled $6.0 million, compared to $8.9 million, $7.3 million and
$8.8 million at June 30, 2007, March 31, 2007 and December 31, 2006, respectively. During
the nine months ended September 30, 2007 charge-offs in the Cape Coral area totaled
$170,000. Charge-offs against existing reserves may increase in future periods.

At
September 30, 2007,  we had classified $47.5 million of our total residential construction
loans as impaired, of which $45.1 million relate to loans purchased from TransLand. We
have established an allowance for loan losses related to the TransLand loans which have
been classified as impaired of $17.4 million. At June 30, 2007, we had classified $28.4
million of our residential construction loans purchased from TransLand as impaired. The
allowance for loan losses related to these loans at June 30, 2007 was $5.7 million.

40

---

Subsequent
to the filing of our June 30, 2007 Quarterly Report on Form 10-Q, we assumed servicing of
all loans purchased from TransLand. This step has allowed us to directly contact each
borrower and restructure terms for their loan where appropriate. To assist in the
settlement and completion of these loans, we have implemented a plan dedicating a team of
Bank loan officers, servicers and collection professionals whose responsibility is to be
primarily focused on these loans. This team is working closely with individual borrowers,
local builders, city officials, local real estate professionals and legal counsel in
working toward completing homes under construction, renegotiating loan terms, servicing
loans and pursuing legal and foreclosure remedies.

During
our due diligence process related to the transfer of residential construction loan
servicing from TransLand to the Bank, alleged fraudulent servicing practices were
discovered. The majority of the alleged fraud related to the withholding of loan payoff
proceeds and periodic payments. A joint petition for involuntary Chapter 11 bankruptcy
was filed on August 23, 2007 in the United States Bankruptcy Court for the Middle
District of Florida by the Bank and two other financial institutions against TransLand.
In addition to seeking recoveries from TransLand, the Bank is also insured up to $7.5
million against fraudulent activity by loan servicers. A $6.9 million receivable from
TransLand associated with the alleged misappropriation of loan payoff proceeds and
periodic payments due to the Bank was recorded as loans receivable at June 30, 2007.
During the quarter ended September 30, 2007, the $6.9 million receivable increased to
$12.2 million. The Company determined the recovery from its insurance carrier was
probable and wrote-off $4.8 million of the receivable as a charge to other operating
expense during the third quarter. A receivable of $7.4 million is now recorded as other
assets on the Companys Consolidated Statements of Financial Condition at September
30, 2007. Any future recoveries from TransLand beyond the insurance policy amount would
be recorded as other operating income or a reduction of other operating expense depending
upon the periods in which the funds are received. Management determined that the effect
of the modification was not material in relation to the consolidated financial statements
included in our June 30, 2007 Quarterly Report of Form 10-Q.

Under
the Merger Agreement, if the Cape Coral loans are valid, enforceable loans that satisfy
certain documentation and lien perfection requirements and the loans have been solicited,
originated, administered and serviced in accordance with the relevant loan documents,
Bank underwriting standards and laws, then no deterioration or change (other than those
attributable to externalities such as acts of God and or deterioration of political
conditions, market conditions or interest rates that have a disproportionate adverse
effect of the Cape Coral loans) in the Cape Coral loans will constitute a Material
Adverse Effect under the Merger Agreement. As a result of the agreement provision
and other factors, we believe that any deterioration or change in the Cape Coral loans
that has occurred should not affect CapitalSources obligation to complete the
Merger. See Part II, Item 1A., Risk Factors  CapitalSource may attempt to
terminate the Merger Agreement if it believes events have had, or are reasonably likely to
have, a material adverse effect on our business, results of operations or financial
condition.

FHLBank
Topeka Stock. FHLBank Topeka (FHLBank) stock totaled $64.9
million at September 30, 2007, an increase of $2.9 million, or 4.7%, compared to $62.0
million at December 31, 2006. The increase was attributable to FHLBank dividends paid in
stock received during the nine months ended September 30, 2007.

41

---

Premises
and Equipment.Premises and equipment decreased $1.3 million, or 3.3%, to
$38.5 million at September 30, 2007 compared to $39.8 million at December 31, 2006. The
decrease was attributable to $3.0 million of depreciation and amortization expense which
was partially offset by $1.7 million in asset additions.

Goodwill
and Other Intangible Assets.Goodwill totaled $42.1 million at September
30, 2007, a decrease of $127,000, or 0.3%, compared to $42.2 million at December 31, 2006
and relates to the 2004 acquisition of United Nebraska Financial Co. (UNFC).
The decline in goodwill is attributable to the realization of a $61,000 tax benefit
related to the UNFC acquisition and a $66,000 adjustment resulting from the adoption of
Financial Accounting Standards Board (FASB) Interpretation No. 48.

Other
Intangible Assets. Other intangible assets totaled $7.1 million at
September 30, 2007, a decrease of $1.3 million, or 15.0%, compared to $8.4 million at
December 31, 2006 and relates to the core deposit intangible assets recorded as a result
of the UNFC acquisition and the Marine Bank transaction. The decrease was attributable to
$1.3 million in amortization during the nine months ended September 30, 2007.

Other
Assets.Other assets increased $28.3 million, or 128.4%, to $50.3 million
at September 30, 2007 compared to $22.0 million at December 31, 2006. Other assets
consists primarily of prepaid expenses, miscellaneous receivables and other assets. The
increase in other assets at September 30, 2007 is primarily attributable to a $13.3
million increase in deferred tax assets and a $7.4 million receivable which was
reclassified to other assets from our loan portfolio. The increase in deferred tax assets
was related to the increase in our allowance for loan losses and increased taxable income
due to the accelerated recognition of deferred loan fees. At September 30, 2007, other
assets includes a $7.5 million insurance receivable relating to TransLand, less a
$100,000 insurance policy deductible, that was not included in other assets at December
31, 2006. At September 30, 2007, we had a $12.2 million receivable from TransLand
associated with the alleged misappropriation of loan payoff proceeds and periodic
payments. At September 30, 2007, we recorded a write-off totaling $4.8 million of the
Transland receivable to other operating expense in the Consolidated Statements of Income.
This amount represents the excess of the aggregate TransLand receivable over the amount
of our insurance coverage. We believe that it is probable we will collect the proceeds on
the insurance bond.

42

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# Liabilities and
Stockholders Equity

General.          Our
total liabilities were $3.2 billion at September 30, 2007, an increase of
          $101.7 million, or 3.3%, compared to $3.1 billion at December 31, 2006. We
          utilized increased deposits to reduce our FHLBank advances during the nine
          months ended September 30, 2007.

Deposits.          Deposits
increased $302.5 million, or 14.7%, to $2.4 billion at September 30,           2007
compared to $2.1 billion at December 31, 2006.

|(Dollars in thousands)       | September 30, 2007 | December 31, 2006 | Increase (Decrease) | % Change 
|---------------------------- | ------------------ | ----------------- | ------------------- | ---------
|Noninterest-bearing checking |                    |                   | $                   | 150,071  
|Savings                      |                    |                   |                     | 143,492  
|Interest-bearing checking    |                    |                   |                     | 310,055  
|Money market                 |                    |                   |                     | 353,934  
|Time deposits                |                    |                   |                     | 1,397,286
|                            
|Total retail deposits        |                    |                   |                     | 2,354,838
|Brokered time deposits       |                    |                   |                     | --       
|                            
|Total deposits               |                    |                   | $                   | 2,354,838
|                            

Our
transaction accounts (checking, savings and money market) totaled $957.6 million at
September 30, 2007, an increase of $25.8 million, or 2.8%, compared to $931.8 million at
December 31, 2006. The increase in our savings accounts was attributable to a new savings
account which was introduced during the three months ended September 30, 2007. The number
of transaction accounts increased by 4,276 accounts, or 3.3%, to 132,876 accounts compared
to 128,600 accounts at December 31, 2006. The weighted average interest rate of our
transaction accounts was 2.03% at September 30, 2007 compared to 1.68% at December 31,
2006. The increase in our time deposits was primarily the result of marketing promotions
throughout 2007. The weighted average interest rate of our time deposits was 5.07% at
September 30, 2007 compared to 4.81% at December 31, 2006.

FHLBank
Advances and Other Borrowings. Our FHLBank advances and other borrowings
totaled $767.3 million at September 30, 2007, a decrease of $195.1 million, or 20.3%,
compared to $962.4 million at December 31, 2006. The decrease in FHLBank advances and
other borrowings at September 30, 2007 was primarily attributable to the utilization of
increased deposits to reduce our FHLBank advances. The weighted average interest rate on
FHLBank advances executed during the nine months ended September 30, 2007 was 3.94%. The
weighted average interest rate on FHLBank advances which matured or were called by the
FHLBank during the nine months ended September 30, 2007 was 3.76%. We did not have an
outstanding balance on our FHLBank line of credit at September 30, 2007 compared to an
outstanding balance of $72.5 million at December 31, 2006. The weighted average interest
rate on our FHLBank advances and other borrowings was 4.47% at September 30, 2007, an
increase of seven basis points compared to 4.40% at December 31, 2006.

Accrued
Expenses and Other Liabilities. Our accrued expenses and other liabilities
totaled $34.2 million at September 30, 2007, an increase of $4.9 million, or 16.6%,
compared to $29.3 million at December 31, 2006. The primary items comprising accrued
expenses and other liabilities are accrued taxes payable, deferred compensation
agreements, loan servicing payments and other miscellaneous accrued expenses.

43

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Stockholders
Equity. At September 30, 2007, stockholders equity totaled $363.1
million, an increase of $9.8 million, or 2.8%, compared to $353.3 million at December 31,
2006. The increase in stockholders equity primarily reflected net income of $6.0
million during the nine months ended September 30, 2007, $3.1 million related to common
stock earned by participants in the Employee Stock Ownership Plan (ESOP), $2.2
million related to amortization of awards under the 2003 Management Recognition and
Retention Plan (MRRP) and $1.3 million related to amortization of stock
options under the 2003 Stock Option Plan (SOP). These increases were partially
offset by $3.9 million in cash dividends paid to our stockholders. We paid cash dividends
of $0.07 per share on March 31, 2007 to stockholders of record on March 15, 2007 and $0.08
per common share on June 29, 2007 and September 28, 2007 to stockholders of record on June
15, 2007 and September 14, 2007.

On
July 27, 2004, we announced that our Board of Directors had authorized the repurchase of
up to 1,828,581 shares of our outstanding common stock. There is no stated expiration date
for this authorization. We repurchased 7,111 shares of our outstanding common stock to
support employee benefit programs during the nine months ended September 30, 2007. We did
not repurchase any shares of our outstanding common stock during the three months ended
September 30, 2007. After accounting for earlier repurchases, at September 30, 2007, the
total remaining common stock repurchase authority was 1,519,948 shares.

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

Net
Income (Loss). Net loss for the three months ended September 30, 2007 was
$5.9 million, or $0.34 per diluted share ($0.35 per basic share), compared to net income
of $11.5 million, or $0.67 per diluted share ($0.70 per basic share), for the three months
ended September 30, 2006. Net income for the nine months ended September 30, 2007 was $6.0
million, or $0.35 per diluted share ($0.36 per basic share), compared to net income of
$30.4 million, or $1.78 per diluted share ($1.85 per basic share), for the nine months
ended September 30, 2006. The decrease in our net income for the three and nine month
periods ended September 30, 2007 compared to the same periods in 2006 was primarily
attributable to the increase in the provision for loan losses resulting from an increased
level of nonperforming loans. Our net income for the three and nine months ended September
30, 2007 was also negatively affected by a $4.8 million receivable write-off.

Net
Interest Income. Net interest income is the most significant component of
our earnings and consists of interest income on interest-earning assets offset by interest
expense on interest-bearing liabilities. Changes in net interest income result from
changes in volume, net interest spread and net interest margin. Volume relates to the
level of interest-earning assets and interest-bearing liabilities. Net interest spread
refers to the difference between the yield on interest-earning assets and the rate paid on
interest-bearing liabilities. Net interest margin refers to net interest income divided by
total interest-earning assets and is influenced by the level and mix of interest-earning
assets and interest-bearing liabilities.

44

---

Net
interest income, average interest rate spread and net interest margin for the three and
nine months ended September 30, 2007 were negatively affected by the increased balance of
our nonperforming loans as we do not recognize interest income on loans 90 days or more
past due. We had nonperforming loans totaling $78.4 million and $19.9 million at September
30, 2007 and 2006, respectively.

Net
interest income before provision for loan losses totaled $29.3 million for the three
months ended September 30, 2007, a decrease of $4.8 million, or 14.1%, compared to $34.1
million for the three months ended September 30, 2006. The decrease in net interest
income was primarily attributable to a $286.1 million increase in the average balance of
time deposits and an 80 basis point increase in the average interest rate paid on time
deposits. For the nine months ended September 30, 2007, our net interest income totaled
$91.2 million, a decrease of $3.5 million, or 3.7%, compared to $94.7 million for the
nine months ended September 30, 2006. The decrease in net interest income was primarily
attributable to a 106 basis point increase in the average rate paid on time deposits and
an increase of $170.9 million in the average balance of time deposits. Our net interest
income for the three and nine months ended September 30, 2006 was supplemented by a $2.7
million loan prepayment fee collected on a commercial real estate loan.

Our
average interest rate spread for the three months ended September 30, 2007 and 2006 was
3.14% and 4.03%, respectively. Our average interest rate spread was 3.33% for the nine
months ended September 30, 2007 compared to 3.78% for the nine months ended September 30,
2006. The decrease in our average interest rate spread was attributable to an increase in
the average rate paid on interest-bearing liabilities, primarily time deposits.
Additionally, our average yield earned on loans receivable was negatively affected by the
increased balance of our nonperforming loans.

The
average yield on interest-earning assets was 7.31% for the three months ended September
30, 2007, a 42 basis point decrease compared to 7.73% for the three months ended September
30, 2006. The decrease in the average yield earned on interest-earning assets was primarily related to a decrease in the average
yield earned on loans receivable. Our average yield earned on loans receivable for the
three months ended September 30, 2007 and 2006 was 7.49% and 7.90%, respectively. The
average yield on interest-earning assets was 7.35% for the nine months ended September 30,
2007, an 18 basis point increase compared to 7.17% for the nine months ended September 30,
2006. The increase in the average yield earned on interest-earning assets for the nine
months ended September 30, 2007 was primarily related to an increase in the average yield
earned on loans receivable. Our average yield earned on loans receivable for the nine
months ended September 30, 2007 and 2006 was 7.51% and 7.32%, respectively. This increase
was primarily the result of our lending strategy to focus on loans with relatively higher
yields, adjustable interest rates and/or shorter terms to maturity. Our average rate paid
on interest bearing liabilities was 4.17% for the three months ended September 30, 2007,
an increase of 47 basis points compared to 3.70% for the three months ended September 30,
2006. Our average rate paid on interest bearing liabilities was 4.02% for the nine months
ended September 30, 2007, an increase of 63 basis points compared to 3.39% for the nine
months ended September 30, 2006. The increase in the average rate paid on interest-bearing
liabilities was primarily the result of customers migrating to higher-yielding deposit
products such as time deposits.

45

---

Our
net interest margin (net interest income (annualized) divided by average interest-earning
assets) declined to 3.58% for the three months ended September 30, 2007 compared to 4.40%
for the three months ended September 30, 2006. The decrease in our net interest margin was
attributable to the increased balance of our nonperforming loans and the increased average
interest rate on our interest-bearing liabilities, primarily time deposits.

Our
net interest margin was 3.76% for the nine months ended September 30, 2007 compared to
4.11% for the nine months ended September 30, 2006. The decrease in net interest margin
was primarily attributable to the increased average interest rate on our interest-bearing
liabilities, primarily time deposits. This decrease was partially offset by the increase
in the average balance and average yield earned on loans receivable. Our net interest
margin for the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006 was negatively impacted by the increased balance of nonperforming
loans.

Excluding
the receipt of the $2.7 million loan prepayment fee, our average interest rate spread
would have been 3.69% and 3.67%, respectively, for the three and nine months ended
September 30, 2006. Our net interest margin would have been 4.06% and 4.00%, respectively,
for the three and nine months ended September 30, 2006 after excluding the loan prepayment
fee.

We
anticipate that our average interest rate spread and net interest margin will further
compress during the remainder of 2007 due to increased deposit interest costs and
increasing levels of nonperforming loans.

46

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Average
Balances, Net Interest Income, Yields Earned and Cost of Funds.The following
tables show for the periods indicated the total dollar amount of interest from average
interest-earning assets and the resulting yields, as well as the interest expense on
average interest-bearing liabilities, expressed both in dollars and rates, net interest
margin and average interest rate spread. All average balances are based on daily balances.

|                                                                                                                                     | Three Months Ended September 30,
|------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------
|
|
|Interest-earning assets:                                                                                                             |                                 
|Federal funds sold                                                                                                                   |                                 
|Investment securities (1)                                                                                                            |                                 
|Mortgage-backed securities (1)                                                                                                       |                                 
|Loans receivable (2)                                                                                                                 |                                 
|                                                                                                                                    
|Total interest-earning assets                                                                                                        |                                 
|Noninterest-earning assets                                                                                                           |                                 
|                                                                                                                                    
|Total assets                                                                                                                         |                                 
|                                                                                                                                    
|Interest-bearing liabilities:                                                                                                        |                                 
|Interest-bearing checking accounts                                                                                                   |                                 
|Savings accounts                                                                                                                     |                                 
|Money market accounts                                                                                                                |                                 
|Time deposits                                                                                                                        |                                 
|                                                                                                                                    
|Total interest-bearing deposits                                                                                                      |                                 
|FHLBank Topeka advances and                                                                                                          |                                 
|other borrowings                                                                                                                     |                                 
|                                                                                                                                    
|Total interest-bearing liabilities                                                                                                   |                                 
|Noninterest-bearing accounts                                                                                                         |                                 
|Other liabilities                                                                                                                    |                                 
|                                                                                                                                    
|Total liabilities                                                                                                                    |                                 
|Stockholders equity                                                                                                                 |                                 
|                                                                                                                                    
|Total liabilities and stockholders equity                                                                                           |                                 
|                                                                                                                                    
|Net interest-earning assets                                                                                                          |                                 
|Net interest income; average                                                                                                         |                                 
|interest rate spread                                                                                                                 |                                 
|Net interest margin (3)                                                                                                              |                                 
|Average interest-earning assets to average                                                                                           |                                 
|interest-bearing liabilities                                                                                                         |                                 
|                                                                                                                                    
|(1) Includes securities available for sale and held to maturity. Investment securities also include FHLBank Topeka stock.           
|(2) Includes nonperforming loans during the respective periods. Calculated net of unamortized premiums, discounts and deferred fees,
|loans in process and allowance for loan losses.                                                                                     
|(3) Equals net interest income (annualized) divided by average interest-earning assets.                                             
|                                                                                                                                    

47

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|                                                                                                                                     | Nine Months Ended September 30,
|------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------
|
|
|Interest-earning assets:                                                                                                             |                                
|Federal funds sold                                                                                                                   |                                
|Investment securities (1)                                                                                                            |                                
|Mortgage-backed securities (1)                                                                                                       |                                
|Loans receivable (2)                                                                                                                 |                                
|                                                                                                                                    
|Total interest-earning assets                                                                                                        |                                
|Noninterest-earning assets                                                                                                           |                                
|                                                                                                                                    
|Total assets                                                                                                                         |                                
|                                                                                                                                    
|Interest-bearing liabilities:                                                                                                        |                                
|Interest-bearing checking accounts                                                                                                   |                                
|Savings accounts                                                                                                                     |                                
|Money market accounts                                                                                                                |                                
|Time deposits                                                                                                                        |                                
|                                                                                                                                    
|Total interest-bearing deposits                                                                                                      |                                
|FHLBank Topeka advances and                                                                                                          |                                
|other borrowings                                                                                                                     |                                
|                                                                                                                                    
|Total interest-bearing liabilities                                                                                                   |                                
|Noninterest-bearing accounts                                                                                                         |                                
|Other liabilities                                                                                                                    |                                
|                                                                                                                                    
|Total liabilities                                                                                                                    |                                
|Stockholders equity                                                                                                                 |                                
|                                                                                                                                    
|Total liabilities and stockholders equity                                                                                           |                                
|                                                                                                                                    
|Net interest-earning assets                                                                                                          |                                
|Net interest income; average                                                                                                         |                                
|interest rate spread                                                                                                                 |                                
|Net interest margin (3)                                                                                                              |                                
|Average interest-earning assets to average                                                                                           |                                
|interest-bearing liabilities                                                                                                         |                                
|                                                                                                                                    
|(1) Includes securities available for sale and held to maturity. Investment securities also include FHLBank Topeka stock.           
|(2) Includes nonperforming loans during the respective periods. Calculated net of unamortized premiums, discounts and deferred fees,
|loans in process and allowance for loan losses.                                                                                     
|(3) Equals net interest income (annualized) divided by average interest-earning assets.                                             
|                                                                                                                                    

48

---

Rate/Volume Analysis. The following table shows the extent to which changes in
interest rates and changes in the volume of interest-related assets and liabilities
affected our interest income and expense during the periods indicated. For each category
of interest-earning assets and interest-bearing liabilities, information is provided on
changes attributable to: (1) changes in rate (change in rate multiplied by prior year
volume), and (2) changes in volume (change in volume multiplied by prior year rate). The
combined effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.

|                                                                                                                         | Three Months Ended September 30, 2007
Compared to
Three Months Ended September 30, 2006 | Nine Months Ended September 30, 2007
Compared to
Nine Months Ended September 30, 2006
|------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------
|
|
|Interest income:                                                                                                         |                                                                                         |                                                                                      
|Federal funds sold                                                                                                       |                                                                                         |                                                                                      
|Investment securities                                                                                                    |                                                                                         |                                                                                      
|Mortgage-backed securities                                                                                               |                                                                                         |                                                                                      
|Loans receivable (1)                                                                                                     |                                                                                         |                                                                                      
|                                                                                                                        
|Total interest income                                                                                                    |                                                                                         |                                                                                      
|                                                                                                                        
|Interest expense:                                                                                                        |                                                                                         |                                                                                      
|Interest-bearing                                                                                                         |                                                                                         |                                                                                      
|checking accounts                                                                                                        |                                                                                         |                                                                                      
|Savings accounts                                                                                                         |                                                                                         |                                                                                      
|Money market accounts                                                                                                    |                                                                                         |                                                                                      
|Time deposits                                                                                                            |                                                                                         |                                                                                      
|                                                                                                                        
|Total interest expense                                                                                                   |                                                                                         |                                                                                      
|on deposits                                                                                                              |                                                                                         |                                                                                      
|FHLBank Topeka advances and                                                                                              |                                                                                         |                                                                                      
|other borrowings                                                                                                         |                                                                                         |                                                                                      
|                                                                                                                        
|Total interest expense                                                                                                   |                                                                                         |                                                                                      
|                                                                                                                        
|Net change in net interest income                                                                                        |                                                                                         |                                                                                      
|                                                                                                                        
|(1) Calculated net of unamortized premiums, discounts and deferred fees, loans in process and allowance for loan losses.
|                                                                                                                        

49

---

Interest
Income.Our total interest income for the three months ended September 30, 2007
was $59.9 million, a decrease of $84,000, or 0.1%, compared to $60.0 million for the three
months ended September 30, 2006. Interest income on loans receivable totaled $56.0 million
for the three months ended September 30, 2007, a decrease of $1.6 million, or 2.8%,
compared to $57.6 million for the three months ended September 30, 2006. The average
balance of loans receivable increased $72.8 million, or 2.5%, to $3.0 billion for the
three months ended September 30, 2007 compared to $2.9 billion for the three months ended
September 30, 2006. The average yield earned on loans receivable declined to 7.49% for the
three months ended September 30, 2007 compared to 7.90% for the three months ended
September 30, 2006.

The
decrease in interest income for the three months ended September 30, 2007 compared to the
same period one year ago was primarily attributable to the 41 basis point decline in the
average yield earned on loans receivable. Additionally, interest income on loans
receivable was negatively affected by an increased balance of nonperforming loans as we do
not recognize interest income on loans 90 days or more past due. At September 30, 2007 our
nonperforming loans totaled $78.4 million, an increase of $58.5 million, or 294.1%,
compared to $19.9 million at September 30, 2006.

For
the nine months ended September 30, 2007 our total interest income was $178.1 million, an
increase of $13.1 million, or 7.9%, compared to $165.0 million for the nine months ended
September 30, 2006. Interest income on loans receivable totaled $168.5 million for the
nine months ended September, 30, 2007, an increase of $10.2 million, or 6.4%, compared to
$158.3 million for the nine months ended September 30, 2006. The average balance of loans
receivable totaled $3.0 billion for the nine months ended September 30, 2007, an increase
of $109.4 million, or 3.8%, compared to $2.9 billion for the nine months ended September
30, 2006. The average yield earned on the loan portfolio was 7.51% and 7.32% for the nine
months ended September 30, 2007 and 2006, respectively.

The
increase in total interest income for the nine months ended September 30, 2007 was
primarily attributable to an increase in interest income on loans receivable. The increase
in interest income on loans receivable was primarily attributable to an increase in the
average balance of loans receivable and to a lesser extent an increase in the average
yield earned on loans receivable. The increase in the average yield earned on and average
balance of loans receivable was primarily the result of our lending strategy to focus on
and sustain our holdings of loans with relatively higher yields, adjustable interest rates
and/or shorter terms to maturity. The increases in the average balance and average yield
earned on loans receivable were partially offset by the increased balance of nonperforming
loans.

Interest
Expense.Our total interest expense for the three months ended September 30, 2007
was $30.6 million, an increase of $4.7 million, or 18.3%, compared to $25.8 million for
the three months ended September 30, 2006. Interest expense on deposits totaled $21.8
million for the three months ended September 30, 2007, an increase of $6.2 million, or
39.8%, compared to $15.6 million for the three months ended September 30, 2006. Interest
expense on FHLBank advances and other borrowings declined $1.5 million, or 14.4%, to $8.8
million for the three months ended September 30, 2007 compared to $10.2 million for the
three months ended September 30, 2006. The average rate paid on interest-bearing deposits
was 4.07% and 3.32% for the three months ended September 30, 2007 and 2006, respectively.
The average rate paid on FHLBank advances and other borrowings was 4.46% for each of the
three month periods ended September 30, 2007 and 2006. Additionally, the average balance
of our interest-bearing liabilities totaled $2.9 billion for the three months ended
September 30, 2007, an increase of $134.6 million, or 4.8%, compared to $2.8 billion for
the three months ended September 30, 2006. The average balance of our interest-bearing
deposits increased $267.4 million, or 14.2%, to $2.1 billion for the three months ended
September 30, 2007 compared to $1.9 billion for the three months ended September 30, 2006.
The average balance of our FHLBank advances and other borrowings totaled $785.4 million
for the three months ended September 30, 2007, a decrease of $132.8 million, or 14.5%,
compared to $918.2 million for the three months ended September 30, 2006.

50

---

Our
total interest expense for the nine months ended September 30, 2007 was $86.9 million, an
increase of $16.6 million, or 23.6%, compared to $70.3 million for the nine months ended
September 30, 2006. Interest expense on deposits totaled $59.1 million for the nine months
ended September 30, 2007, an increase of $16.1 million, or 37.3%, compared to $43.0
million for the nine months ended September 30, 2006. Interest expense on FHLBank advance
and other borrowings increased $520,000, or 1.9%, to $27.8 million for the nine months
ended September 30, 2007 compared to $27.3 million for the nine months ended September 30,
2006. The average rate paid on interest-bearing deposits was 3.87% and 3.03% for the nine
months ended September 30, 2007 and 2006, respectively. The average rate paid on FHLBank
advances and other borrowings increased to 4.37% for the nine months ended September 30,
2007 compared to 4.15% for the nine months ended September 30, 2006. Additionally, the
average balance of our interest-bearing liabilities totaled $2.9 billion for the nine
months ended September 30, 2007, an increase of $115.2 million, or 4.2%, compared to $2.8
billion for the nine months ended September 30, 2006. The average balance of our
interest-bearing deposits increased $143.9 million, or 7.6%, to $2.0 billion for the nine
months ended September 30, 2007 compared to $1.9 billion for the nine months ended
September 30, 2006. The average balance of our FHLBank advances and other borrowings
totaled $849.2 million for the nine months ended September 30, 2007, a decrease of $28.7
million, or 3.3%, compared to $877.9 million for the nine months ended September 30, 2006.

The
increase in interest expense was primarily attributable to an increase in the average rate
paid on interest-bearing liabilities. This increase was primarily the result of the
increase in the average rate paid on time deposits which was the result of marketing
promotions designed to attract new customers. Additionally, the increase was also
attributable to customers migrating to higher-yielding deposit products.

Provision
for Loan Losses. We establish provisions for loan losses in order to
maintain the allowance for loan losses at a level we believe, to the best of our
knowledge, covers all known and inherent losses in the portfolio that are both probable
and reasonable to estimate at each reporting date. Management performs reviews no less
frequently than quarterly in order to identify these inherent losses and to assess the
overall collection probability for the loan portfolio. Our reviews consist of a
quantitative analysis by loan category, using historical loss experience, and
consideration of a series of qualitative loss factors (See Note 3 to the Consolidated
Financial Statements, Critical Accounting Policies  Allowance for Loan
Losses).

We
recorded a provision for loan losses of $17.5 million for the three months ended September
30, 2007 compared to $1.1 million for the three months ended September 30, 2006, an
increase of $16.3 million. For the nine months ended September 30, 2007 our provision for
loan losses totaled $29.2 million, an increase of $24.9 million, compared to $4.3 million
for the nine months ended September 30, 2006. The increase in our provision for loan
losses for the three and nine months ended September 30, 2007 compared to the three and
nine months ended September 30, 2006 was primarily attributable to the increase in our
nonperforming residential construction loans. At September 30, 2007 our nonperforming
residential construction loans totaled $56.3 million, an increase of $46.3 million, or
462.4%, compared to $10.0 million at September 30, 2006. Our focus on loans with
relatively higher yields, adjustable interest rates and/or shorter terms to maturity also
subjects us to a potentially higher degree of credit risk. Our loan delinquency rate (30
or more days delinquent) at September 30, 2007 as a percentage of net loans (before
allowance for loan losses) was 4.23% compared to 1.89% at December 31, 2006 and 1.72% at
September 30, 2006. Our level of nonperforming loans and loan delinquencies may continue
to increase.

51

---

During
the three months ended September 30, 2007 and 2006, we charged-off, net of recoveries,
$1.9 million and $948,000, respectively. For the nine months ended September 30, 2007 and
2006, we charged-off, net of recoveries, $3.5 million and $2.8 million, respectively.
Charge-offs, net of recoveries, during the nine months ended September 30, 2007 consisted
primarily of $1.6 million of business loans, $1.4 million of consumer loans and $670,000
of residential construction loans. Our charge-offs, net of recoveries, as a percentage of
average loans outstanding were 0.16% and 0.13% for the nine months ended September 30,
2007 and 2006, respectively. Our strategy of focusing on loans with relatively higher
yields, adjustable interest rates and/or shorter terms to maturity subjects us to an
increased level of credit risk which has resulted in an increased amount of nonperforming
loans, loan delinquencies and charge-offs. Our volume of loan charge-offs may continue to
increase in future periods.

Noninterest
Income. Noninterest income for the three months ended September 30, 2007 was $7.5 million,
an increase of $595,000, or 8.6%, compared to $6.9 million for the three months ended
September 30, 2006.

|                                         | Three Months Ended
September 30, | Increase
|---------------------------------------- | -------------------------------- | --------
|
|Deposit account fees and service charges |                                  |         
|Debit card fees                          |                                  |         
|Lending fees and service charges         |                                  |         
|Commissions and management fee income    |                                  |         
|Loss from real estate operations, net    |                                  |         
|Net gain (loss) on sales of:             |                                  |         
|Loans held for sale                      |                                  |         
|Real estate owned                        |                                  |         
|Other operating income                   |                                  |         
|                                        
|Total noninterest income                 |                                  |         
|                                        

52

---

Noninterest
income for the nine months ended September 30, 2007 was $21.9 million, an increase of $1.3
million, or 6.4%, compared to $20.5 million for the nine months ended September 30, 2006.

|                                         | Nine Months Ended
September 30, | Increase
|---------------------------------------- | ------------------------------- | --------
|
|Deposit account fees and service charges |                                 |         
|Debit card fees                          |                                 |         
|Lending fees and service charges         |                                 |         
|Commissions and management fee income    |                                 |         
|Loss from real estate operations, net    |                                 |         
|Net gain (loss) on sales of:             |                                 |         
|Investment securities                    |                                 |         
|Loans held for sale                      |                                 |         
|Real estate owned                        |                                 |         
|Other operating income                   |                                 |         
|                                        
|Total noninterest income                 |                                 |         
|                                        

Growth
in noninterest income during the three and nine months ended September 30, 2007 compared
to the three and nine months ended September 30, 2006 was primarily attributable to
increases in commissions and management fee income. These increases were primarily
attributable to fees collected by TierOne Financial, a subsidiary that administers the
sale of securities and insurance products. The increase in deposit account and debit card
fees was largely due to an increase in the number of transaction accounts and in the
volume of activity.

Noninterest
Expense.Our noninterest expense increased by $6.6 million, or 31.0%, to $27.7
million for the three months ended September 30, 2007 compared to $21.1 million for the
three months ended September 30, 2006.

|                                           | Three Months Ended
September 30, | Increase
|------------------------------------------ | -------------------------------- | --------
|
|Employee compensation                      |                                  |         
|Employee benefits                          |                                  |         
|Payroll taxes                              |                                  |         
|Management Recognition and Retention Plan  |                                  |         
|Employee Stock Ownership Plan              |                                  |         
|2003 Stock Option Plan                     |                                  |         
|Occupancy, net                             |                                  |         
|Data processing                            |                                  |         
|Advertising                                |                                  |         
|Core deposit intangible asset amortization |                                  |         
|Professional services                      |                                  |         
|TransLand receivable write-off             |                                  |         
|Other                                      |                                  |         
|                                          
|Total noninterest expense                  |                                  |         
|                                          

53

---

Our
noninterest expense increased by $10.5 million, or 17.1%, to $72.0 million for the nine
months ended September 30, 2007 compared to $61.4 million for the nine months ended
September 30, 2006.

|                                           | Nine Months Ended
September 30, | Increase
|------------------------------------------ | ------------------------------- | --------
|
|Employee compensation                      |                                 |         
|Employee benefits                          |                                 |         
|Payroll taxes                              |                                 |         
|Management Recognition and Retention Plan  |                                 |         
|Employee Stock Ownership Plan              |                                 |         
|2003 Stock Option Plan                     |                                 |         
|Occupancy, net                             |                                 |         
|Data processing                            |                                 |         
|Advertising                                |                                 |         
|Core deposit intangible asset amortization |                                 |         
|Professional services                      |                                 |         
|TransLand receivable write-off             |                                 |         
|Other                                      |                                 |         
|                                          
|Total noninterest expense                  |                                 |         
|                                          

The
increase in noninterest expense during the three and nine months ended September 30, 2007
compared to the three and nine months ended September 30, 2006 was primarily attributable
to the Transland receivable write-off, increases in employee compensation, employee
benefits, payroll taxes and professional services. During the three months ended September
30, 2007, we recorded a charge to other operating expense of $4.8 million to write-off the
uninsured portion of a $12.2 million receivable from Transland that relates to alleged
misappropriation of loan payoff proceeds and periodic payments due to us. We believe that
it is probable we will collect the proceeds of the insurance bond we have to protect us
against fraudulent activity by loan servicers. The increase in employee compensation,
employee benefits and payroll taxes resulted from personnel growth and annual salary
increases. At September 30, 2007 and 2006, we had 858 and 832 full-time equivalent
employees, respectively. We had 850 full-time equivalent employees at December 31, 2006.
The increase in professional services expense for the three and nine months ended
September 30, 2007 was primarily related to consulting, legal and accounting services
associated with the Merger Agreement.

Income
Tax Expense.Our income tax expense decreased by $9.7 million, or 133.2%, for an
income tax benefit of $2.4 million for the three months ended September 30, 2007 compared
to income tax expense of $7.3 million for the three months ended September 30, 2006. Our
income tax expense decreased by $13.1 million, or 68.9%, to $5.9 million for the nine
months ended September 30, 2007 compared to $19.0 million for the nine months ended
September 30, 2006. The decrease in income tax expense for the three and nine months ended
September 30, 2007 compared to the same periods in 2006 was primarily due to a decrease in
net income resulting from increased provisions for loan losses. The effective income tax
benefit rate for the three months ended September 30, 2007 was 29.2% compared to an
effective income tax rate of 38.8% for the three months ended September 30, 2006. Our
effective income tax rate for the nine months ended September 30, 2007 was 49.9% compared
to 38.5% for the nine months ended September 30, 2006. The decrease in the effective tax
rate for the three months ended September 30, 2007 and the increase in our effective
income tax rate for the nine months ended September 30, 2007 were primarily attributable
to the impact of permanent tax items in relation to our net income (loss). Nondeductible
expenses related to the Merger Agreement were $516,000 and $1.5 million for the three and
nine months ended September 30, 2007, respectively.

54

---

# Liquidity

Our
primary sources of funds are deposits; amortization of loans; loan prepayments and
maturity of loans; maturity or sale of investment and mortgage-backed securities; and
other funds provided from operations. While scheduled payments from the amortization of
loans and mortgage-backed securities and maturing investment securities are relatively
predictable sources of funds, deposit flows and loan prepayments can be greatly influenced
by general interest rates, economic conditions and competition. We utilize FHLBank
advances and other borrowings and brokered time deposits as additional funding sources.

We
actively manage our liquidity in an effort to maintain an adequate liquidity margin over
the level necessary to support expected and potential loan fundings and deposit
withdrawals. Our liquidity level may vary throughout the year, depending on economic
conditions, deposit fluctuations and loan funding needs.

During
the nine months ended September 30, 2007, net cash provided by operating activities was
$13.9 million. Net cash used in investing activities during the nine months ended
September 30, 2007 was $12.4 million and primarily related to the purchase of available
for sale investment securities partially offset by cash inflows from matured investment
securities and a decrease in loans receivable. Net cash provided by financing activities
was $94.3 million for the nine months ended September 30, 2007 and consisted primarily of
cash inflows from deposits partially offset by cash outflows related to the repayment of
FHLBank advances (including line of credit) and cash dividends paid on our common stock.

Deposits,
particularly core deposits, provide a more preferable source of funding than FHLBank
advances and other borrowings. However, to the extent that competitive or market factors
do not allow us to meet our funding needs with deposits alone, FHLBank advances and other
borrowings provide a readily available alternative source of liquidity. Deposits increased
$302.5 million, or 14.7%, to $2.4 billion at September 30, 2007 compared to $2.1 billion
at December 31, 2006. The increase in deposits during the nine months ended September 30,
2007 was used to reduce our FHLBank advances. In addition, due to a decreased volume of
lending activity we had $182.6 million of cash and cash equivalents at September 30, 2007,
an increase of $95.8 million, or 110.3%, compared to $86.8 million at December 31, 2006.
At September 30, 2007, we had time deposits maturing within the next 12 months amounting
to $1.3 billion. Based upon historical experience, we anticipate that a significant
portion of the maturing time deposits will be renewed with us.

In
addition to cash flows generated by loan and securities payments and prepayments, we have
additional borrowing capacity to fund our asset growth. The average balance of our FHLBank
advances and other borrowings was $849.2 million for the nine months ended September 30,
2007 compared to $877.9 million for the nine months ended September 30, 2006. To date,
substantially all of our borrowings have consisted of FHLBank advances. Pursuant to
blanket collateral agreements with the FHLBank, we have pledged qualifying residential,
multi-family residential and commercial real estate mortgages, residential construction,
commercial construction and agricultural real estate loans as collateral for our FHLBank
advances.

55

---

# Aggregate Contractual
Obligations and Off-Balance Sheet Arrangements

We
have sufficient liquidity to fund existing and future loan commitments, to fund maturing
time deposits and demand deposit withdrawals, to invest in other interest-earning assets
and to meet operating expenses. At September 30, 2007, we had the following contractual
obligations (excluding bank deposits and interest) and lending commitments:

|                                                                                                         |  | Due In
|-------------------------------------------------------------------------------------------------------- |  | ------
|
|Contractual obligations:                                                                                 |  |       
|FHLBank Topeka advances                                                                                  |  |       
|and other borrowings                                                                                     |  |       
|Recourse obligations on assets                                                                           |  |       
|Annual rental commitments under non-                                                                     |  |       
|cancellable operating leases                                                                             |  |       
|                                                                                                        
|Total contractual obligations (1)                                                                        |  |       
|                                                                                                        
|Lending commitments:                                                                                     |  |       
|Commitments to originate loans                                                                           |  |       
|Commitments to sell loans                                                                                |  |       
|Commitments to purchase loans                                                                            |  |       
|Loans in process (2)                                                                                     |  |       
|Standby letters of credit                                                                                |  |       
|Unused lines of credit:                                                                                  |  |       
|Warehouse mortgage lines of credit                                                                       |  |       
|Business loans                                                                                           |  |       
|Consumer loans                                                                                           |  |       
|                                                                                                        
|Total lending commitments and                                                                            |  |       
|unused lines of credit                                                                                   |  |       
|                                                                                                        
|Total contractual obligations, lending                                                                   |  |       
|commitments and unused lines of credit                                                                   |  |       
|                                                                                                        
|(1) Unrealized tax benefits of $4.6 million, associated with FIN 48, are not included in the above table
|as the timing and resolution of these unrealized benefits cannot be reasonably estimated at this time.  
|(2) Loans in process represents the undisbursed portion of construction and land development loans.     
|                                                                                                        

We
have not used, and have no intention to use, any significant off-balance sheet financing
arrangements for liquidity purposes or otherwise. Our primary financial instruments with
off-balance sheet risk are limited to loan servicing for others, our obligations to fund
loans to customers pursuant to existing commitments and commitments to purchase and sell
mortgage loans. In addition, we have certain risks due to limited recourse arrangements on
loans serviced for others and recourse obligations related to loan sales. At September 30,
2007, the maximum total dollar amount of such recourse was approximately $18.6 million.
Based on historical experience, at September 30, 2007, we had established a liability of
$733,000 with respect to this recourse obligation. In addition, we have not had, and have
no intention to have, any significant transactions, arrangements or other relationships
with any unconsolidated, special purpose entities.

56

---

# Regulatory Capital

We
are subject to various regulatory capital requirements administered by federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
additional discretionary actions by regulators that, if undertaken, could have a direct
material adverse effect on our financial condition and results of operations. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, we
must meet specific capital guidelines that involve quantitative measures of our assets,
liabilities and certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.

Quantitative
measures that have been established by regulation to ensure capital adequacy require that
we maintain minimum capital amounts and ratios (as set forth in the following table). Our
primary regulatory agency, the Office of Thrift Supervision (OTS), requires
that we maintain minimum ratios of tangible capital (as defined in the regulations) of
1.5%, core capital (as defined) of 4.0% and total risk-based capital (as defined) of 8.0%.
As of September 30, 2007, we exceed all capital requirements to which we are subject.

At
September 30, 2007 and December 31, 2006, the most recent notifications from the OTS
categorized the Bank as well capitalized under the regulatory framework. There
are no conditions or events since these notifications that we believe have changed the
Banks category. The actual capital amounts and ratios at September 30, 2007 and
December 31, 2006 are presented in the following table:

|                            | Actual | For Capital
Adequacy Purposes | To be Well Capitalized
Under Prompt Corrective
Action Provisions
|--------------------------- | ------ | ----------------------------- | ----------------------------------------------------------------
|
|At September 30, 2007:      |        |                               |                                                                 
|Total risk-based capital    |        |                              
|(to risk-weighted assets)   |        |                               | $                                                               
|Tier 1 capital (to adjusted |        |                              
|tangible assets)            |        |                               |                                                                 
|Tangible capital (to        |        |                              
|tangible assets)            |        |                               |                                                                 
|Tier 1 capital (to risk-    |        |                              
|weighted assets)            |        |                               |                                                                 
|At December 31, 2006:       |        |                              
|Total risk-based capital    |        |                              
|(to risk-weighted assets)   |        |                               | $                                                               
|Tier 1 capital (to adjusted |        |                              
|tangible assets)            |        |                               |                                                                 
|Tangible capital (to        |        |                              
|tangible assets)            |        |                               |                                                                 
|Tier 1 capital (to risk-    |        |                              
|weighted assets)            |        |                               |                                                                 
|                           

57

---

# Selected Financial Data

|(Dollars in thousands, except per share data) | At
September 30,
2007 | At
June 30,
2007 | At
March 31,
2007 | At
December 31,
2006
|--------------------------------------------- | --------------------- | ---------------- | ----------------- | --------------------
|SELECTED FINANCIAL CONDITION DATA:            |                       |                  |                   |                     
|Cash and cash equivalents                     |                       |                  | $                 | 182,555             
|Investment securities                         |                       |                  |                   | 149,826             
|Net loans after allowance for loan losses     |                       |                  |                   | 2,962,072           
|Goodwill                                      |                       |                  |                   | 42,101              
|Total assets                                  |                       |                  |                   | 3,542,677           
|Deposits                                      |                       |                  |                   | 2,354,838           
|FHLBank Topeka advances and other borrowings  |                       |                  |                   | 767,303             
|Stockholders equity                          |                       |                  |                   | 363,077             
|                                             

|                                                                                                                                 | For the Three Months Ended
|-------------------------------------------------------------------------------------------------------------------------------- | --------------------------
|
|SELECTED STATEMENT OF CONDITION DATA:                                                                                            |                           
|Total interest income                                                                                                            |                           
|Total interest expense                                                                                                           |                           
|                                                                                                                                
|Net interest income                                                                                                              |                           
|Provision for loan losses                                                                                                        |                           
|                                                                                                                                
|Net interest income after provision                                                                                              |                           
|for loan losses                                                                                                                  |                           
|                                                                                                                                
|Total noninterest income                                                                                                         |                           
|Total noninterest expense                                                                                                        |                           
|                                                                                                                                
|Income (loss) before income taxes                                                                                                |                           
|Income tax expense (benefit)                                                                                                     |                           
|                                                                                                                                
|Net income (loss)                                                                                                                |                           
|                                                                                                                                
|Net income (loss) per common share, basic                                                                                        |                           
|Net income (loss) per common share, diluted                                                                                      |                           
|Dividends declared per common share                                                                                              |                           
|                                                                                                                                
|SELECTED OPERATING RATIOS:                                                                                                       |                           
|Average yield on interest-earning assets                                                                                         |                           
|Average rate on interest-bearing liabilities                                                                                     |                           
|Average interest rate spread                                                                                                     |                           
|Net interest margin                                                                                                              |                           
|Average interest-earning assets to                                                                                               |                           
|average interest-bearing liabilities                                                                                             |                           
|Net interest income after provision for                                                                                          |                           
|loan losses to noninterest expense                                                                                               |                           
|Total noninterest expense to average assets                                                                                      |                           
|Efficiency ratio (1)                                                                                                             |                           
|Return on average assets                                                                                                         |                           
|Return on average equity                                                                                                         |                           
|Average equity to average assets                                                                                                 |                           
|Return on tangible equity (2)                                                                                                    |                           
|                                                                                                                                
|SELECTED ASSET QUALITY RATIOS:                                                                                                   |                           
|Nonperforming loans as a percentage of net loans                                                                                 |                           
|Nonperforming assets as a percentage of total assets                                                                             |                           
|Allowance for loan losses as a percentage of net loans                                                                           |                           
|                                                                                                                                
|(1) Efficiency ratio is calculated as total noninterest expense, less amortization expense of intangible assets, as a percentage
|of the sum of net interest income and noninterest income.                                                                       
|(2) Return on tangible equity is calculated as annualized net income as a percentage of average stockholders equity adjusted   
|for goodwill and other intangible assets.                                                                                       
|                                                                                                                                

58

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# Item 3  Quantitative
and Qualitative Disclosures About Market Risk.

For
a discussion of our asset and liability management policies as well as the methods used to
manage our exposure to the risk of loss from adverse changes in market prices and interest
rates, see Managements Discussion and Analysis of Financial Condition and
Results of Operations  Asset and Liability Management and Quantitative
and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for
the year ended December 31, 2006. There has been no material change in our market risk
position since our prior disclosures.

# Item 4  Controls
and Procedures.

Our
management evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures were effective as of the date of such evaluation to
ensure that material information relating to us, including our consolidated subsidiaries,
was made known to them by others within those entities, particularly during the period in
which this report was being prepared. There was no change in our internal control over
financial reporting that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

59

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# PART II  OTHER
INFORMATION

# Item 1  Legal
Proceedings.

Except
for litigation relating to certain goodwill claims against the United States
(U.S.) and a court action filed by the Bank and two other financial
institutions against a Florida-based mortgage broker, both of which are described below,
we are not involved in any pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business. Such routine legal proceedings, in the
aggregate, are believed by management to be immaterial to our consolidated financial
statements.

On
October 31, 2006, the U.S. Court of Federal Claims (Federal Claims Court)
issued an opinion finding the U.S. liable to the Bank for lost franchise value related to
our damages claim against the U.S. for breach of contract following changes to the rules
for computing our regulatory capital that were required by the adoption of the Financial
Institution Reform Recovery and Enforcement Act of 1989. The Federal Claims Courts
opinion awarding the Bank $4.5 million in damages was appealed to the United States Court
of Appeals for the Federal Circuit (Court of Appeals) by the U.S. on December
29, 2006. The Bank subsequently filed a cross-appeal seeking review of earlier liability
rulings which absolved the U.S. of liability in connection with two other related merger
transactions and reduced the amount of the Banks potential recovery.

All
briefs on appeal have been filed with the Court of Appeals and oral argument of the appeal
is scheduled to be heard on November 8, 2007. There can be no assurance as to the type or
amount of damages, if any, that we may recover or the timing, if we are successful, for
receipt by us of any damages from the U.S.

A
joint petition for involuntary Chapter 11 bankruptcy was filed on August 23, 2007 in the
United States Bankruptcy Court for the Middle District of Florida by the Bank and two
other financial institutions against TransLand Financial Services, Inc.
(TransLand), a mortgage brokerage firm headquartered in Maitland, Florida. The
petition cites TransLand for alleged failure to remit loan payoffs and periodic payments
to the Bank involving approximately $12.9 million of residential loans. On October 8, 2007
a court-appointed examiner furnished a detailed report documenting the alleged fraudulent
activity. The Bank has notified its insurance carrier of a claim against a bond insuring
the Bank for up to $7.5 million against fraudulent losses by loan servicers. The Bank believes
that it is probable it will collect the proceeds on the insurance bond. A hearing on the
Chapter 11 bankruptcy filing is scheduled for November 29, 2007.

60

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# Item 1A  Risk
Factors.

There
were no material changes in the risk factors previously disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2006. The following risk factors relate to the
Merger Agreement:

# Because the market price
of CapitalSource common stock will fluctuate, our stockholders cannot be sure of the
value of the merger consideration they will receive.

If
the Merger is completed, the holders of each share of Company common stock owned prior to
the closing of the Merger will be entitled to receive for each such share:

| |  | $6.80
in cash; plus
| | - | -------------------

| |  | 0.675
shares of CapitalSource common stock; plus
| | - | ------------------------------------------------

| |  | If
the ten-day average closing price of CapitalSource common stock prior to the closing of the merger is:
| | - | ---------------------------------------------------------------------------------------------------------

| | a) | less
than or equal to $25.1852, then 0.405 shares of CapitalSource common stock;
               or
| | -- | --------------------------------------------------------------------------------------------------

| | b) | greater
than $25.1852, then TierOne Corporation stockholders can elect to receive either $10.20                in
cash or $10.20 of CapitalSource common stock.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the Merger Agreement, the
stated maximum amount of CapitalSource stock that a Company stockholder may receive is
1.08 shares. To the extent the merger consideration is paid in CapitalSource shares, any
change in the market price of CapitalSource common stock prior to completion of the Merger
will affect the value of the merger consideration that our stockholders will receive upon
completion of the Merger. Because of this market risk, at the time of our special meeting
and prior to the election deadline, our stockholders will not know or be able to calculate
the number or the value of the shares of CapitalSource common stock they will receive upon
completion of the Merger. We are not permitted to resolicit the vote of our stockholders
solely because of changes in the market price of CapitalSource common stock. Accordingly,
the specific dollar value of CapitalSource common stock a stockholder will receive will
depend on the market value of CapitalSource common stock at the time the Merger is
completed and may decrease from the date the stockholder submits proxy/voting instructions
or makes an election as to the third component of the merger consideration. Stock price
changes may result from a variety of factors, including general market and economic
conditions, changes in the Companys or CapitalSources respective businesses,
operations and prospects, and regulatory considerations. Many of these factors are beyond
our control. Our stockholders should obtain current market quotations for shares of
CapitalSource common stock and for shares of our common stock.

# CapitalSource may
attempt to terminate the Merger Agreement if it believes events have had, or are
reasonably likely to have, a material adverse effect on our business, results of
operations or financial condition.

Our
Board of Directors does not believe that any events have occurred that have had, or are
reasonably likely to have, a material adverse effect on our business, results of
operations or financial condition, as defined in the Merger Agreement. In particular, our
Board of Directors believes that neither the filing of a joint petition for involuntary
Chapter 11 bankruptcy on August 23, 2007 in the United States Bankruptcy Court for the
Middle District of Florida by the Bank and two other financial institutions against
TransLand Financial Services, Inc., a mortgage brokerage firm headquartered in Maitland,
Florida, nor TransLands alleged failure to remit loan payoff proceeds and periodic
payments to the Bank involving approximately $12.2 million of residential construction
loans constitutes such a material adverse effect. In addition to seeking recoveries from
TransLand, we are also insured up to $7.5 million against fraudulent activity by loan
servicers. We have notified our insurance carrier of the potential claim. We have
requested that CapitalSource confirm in writing that it agrees that the TransLand matter
does not constitute a material adverse effect with respect to us. CapitalSource has not
provided such confirmation.

61

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# CapitalSource and the
Company must obtain regulatory approvals to complete the Merger, which, if delayed, not
granted, or granted with unacceptable conditions, may jeopardize or postpone the
completion of the Merger, result in additional expenditures of money and resources or
reduce the anticipated benefits of the Merger.

CapitalSource
and the Company must obtain certain approval in a timely manner from the Office of Thrift
Supervision prior to completion of the Merger. If CapitalSource and the Company do not
receive the Office of Thrift Supervisions approval, or do not receive it on terms
that satisfy the conditions set forth in the Merger Agreement, then neither party will be
obligated, or in some cases permitted, to complete the Merger. The Office of Thrift
Supervision has broad discretion in administering the governing statutes and regulations.
As a condition to approval of the Merger, the Office of Thrift Supervision may impose
requirements, limitations or costs that could negatively affect the way the combined
companies conduct business. These requirements, limitations or costs could jeopardize or
delay the completion of the Merger.

In
addition, CapitalSource has informed us that it intends to seek approval from the Board of
Governors of the Federal Reserve System, with the concurrence of the Office of Thrift
Supervision, to transfer and/or sell to the Bank certain of CapitalSources existing
loan assets in connection with the completion of the Merger. If the Federal Reserve or the
Office of Thrift Supervision do not approve these asset sales, or impose requirements,
limitations or conditions on their approvals, then the anticipated benefits of the Merger to
the combined company may be reduced.

Companies holding more than 10%
of the outstanding shares of CapitalSource common stock may affect or delay the approval
of the Merger by the Office of Thrift Supervision. If these holders do not become savings
and loan holding companies, or the Office of Thrift Supervision does not accept a rebuttal
of control from them, regulatory approval of the Merger would not be obtainable, and the
Merger could not be completed.

Under
the Office of Thrift Supervisions regulations, companies holding more than 10% of
CapitalSources outstanding common stock may be presumed to control CapitalSource,
subject to the opportunity to rebut this presumption by obtaining the Office of Thrift
Supervisions acceptance of a rebuttal submission. If a company holding 10% or more
of CapitalSources outstanding common stock does not rebut the presumption of
control, or reduce its holdings to less than 10% of CapitalSources outstanding
common stock, it would be required to obtain the approval of the Office of Thrift
Supervision to become a savings and loan holding company prior to completion of the
Merger. Some or all of CapitalSources 10% or greater stockholders may not be willing
to become a savings and loan holding company. As a result, if the Office of Thrift
Supervision does not accept a rebuttal of control from them, then regulatory approval of
the Merger would not be obtainable, and the Merger could not be completed. While it is
anticipated that all of the current CapitalSource stockholders that will hold more than
10% of CapitalSources outstanding common stock upon consummation of the proposed
Merger will make rebuttal submissions, these submissions may include requests from the
submitters to modify the Office of Thrift Supervisions standard provisions for these
matters and, accordingly, no assurance can be given that the Office of Thrift Supervision
will accept any rebuttal filing or, if ultimately accepted, that the Office of Thrift
Supervisions consideration of the control issue will not delay materially its
processing of CapitalSources application generally.

62

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# The Merger Agreement
allows CapitalSource the option to terminate the Merger Agreement at its discretion in
some circumstances unrelated to the ability of CapitalSource or the Company to complete
the Merger.

CapitalSource can terminate the
Merger Agreement if:

| |  | CapitalSource
enters into an agreement with a third party providing for that third partys
acquisition of CapitalSource, and CapitalSource pays a reverse termination fee of $40 million;
or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
ten-day average closing price of CapitalSource common stock on the date on which the last
required government approval is obtained is less than $20.00, and CapitalSource pays the
reverse termination fee of $40 million.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If CapitalSource terminates the
Merger Agreement under these circumstances, then the Merger will not be completed. We
currently expect that the last required government approval of the Merger may be obtained
either in the fourth quarter of 2007 or the first quarter of 2008.

# Failure to complete the
Merger could negatively impact our stock price and future business and operations.

If
the Merger is not completed, we may be subject to a number of material risks, including
the following:

| |  | we
may be required to pay CapitalSource a termination fee or reimburse it for a portion of
its expenses;
| | - | --------------------------------------------------------------------------------------------------------

| |  | the
price of our common stock may decline if the current market price of our common stock
reflects a market assumption that the Merger will be completed; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
costs related to the Merger, such as legal, accounting and certain financial advisor
fees, generally must be paid even if the Merger is not completed.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, our customers and suppliers may, in response to the announcement of the Merger,
delay or defer decisions concerning us. Any delay or deferral in those decisions by our
customers or suppliers could have a material adverse effect on our business, regardless of
whether or not the Merger is ultimately completed. Similarly, current and prospective
employees may experience uncertainty about their future role with CapitalSource until
CapitalSources strategies with regard to us are announced or executed. This
uncertainty may adversely affect our ability to attract and retain key management, sales,
marketing and technical personnel.

63

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Further,
if the Merger is terminated and our Board of Directors decides to pursue another Merger or
business combination, there can be no assurance that we will be able to find a partner
willing to pay an equivalent or more attractive price than CapitalSource would have paid
in the Merger.

CapitalSource and the Company
may fail to realize all of the anticipated benefits of the Merger.

We
entered into the Merger Agreement with the expectation that the Merger will result in
significant benefits for both companies. Achieving the benefits of the Merger will depend
in part on integrating the operations and personnel of the two companies in a timely and
efficient manner to minimize the risk that the Merger will result in the loss of customers
or key employees or the diversion of managements attention from other important
issues. This integration may or may not be successful. We cannot offer any assurances that
we and CapitalSource can successfully integrate or realize any of the anticipated
benefits.

Challenges
to the parties ability to realize the anticipated benefits may be heightened if our
exposure to credit risks, particularly in connection with our exposure to residential
construction loans, including those in Cape Coral, Florida, are greater than expected,
which may require us or CapitalSource to increase our allowance for loan losses or
charge-off loans beyond expected levels before or after completion of the Merger. Further,
our financial accounting systems and controls relating to our underwriting and portfolio
management processes may need to be enhanced to track CapitalSources existing
systems and controls. Enhancing these controls could be costly.

# Applicable regulations
affecting savings and loan holding companies could negatively impact both CapitalSources
commercial lending and  investing business and the business of the Bank following the
Merger.

Currently,
CapitalSource is not regulated as a savings and loan holding company or bank holding
company and does not control any FDIC-insured depository institution. Savings banks such
as the Bank are subject to extensive regulation of their activities and investments, their
capitalization, their risk management policies and procedures, and their relationships
with affiliated companies. Upon acquiring control of the Bank and becoming a savings and
loan holding company, CapitalSources operations will be limited to financial and
certain real estate-related activities. These limitations may require CapitalSource to
curtail or divest some of its current commercial lending and investment business
activities. For instance, in connection with its loans used by financial sponsors to
finance purchases of companies, CapitalSource commonly is granted the opportunity to
acquire equity in a borrower at the same time and on substantially the same terms as the
financial sponsor. Some of these equity investments exceed 5% of the borrowers
equity. If CapitalSource does not acquire merchant banking authority that will enable it
to conform these equity investments of more than 5% in non-financial entities to the
requirements of the Home Owners Loan Act within two years of the acquisition of the
Company, it will be required to divest them.

In
addition, as a condition to approving the Merger, the Office of Thrift Supervision may
impose restrictions on the integration of the Banks banking and CapitalSources
commercial lending and investing businesses, and may require prior approval of any future
material changes to the Banks business plans. These regulations and conditions could
constrain CapitalSource in pursuing future business opportunities following the Merger.
These regulations and conditions, and CapitalSources inexperience with them, could
also affect CapitalSources ability to realize synergies from the Merger, and could
negatively affect both CapitalSource and the Bank following the Merger.

64

---

The value of the CapitalSource
common stock our stockholders receive in the Merger may fluctuate after the Merger.
Neither CapitalSource nor the Company can predict how the CapitalSource common stock will
trade subsequent to the closing of the Merger.

Stock
price changes may result from a variety of factors, including general market and economic
conditions; changes in CapitalSources businesses, operations and prospects; and
regulatory considerations. Many of these factors are beyond CapitalSources control.
The market price of CapitalSource common stock may decline as a result of the Merger if:

| |  | the
integration of CapitalSource and the Company is unsuccessful;
| | - | -----------------------------------------------------------------

| |  | CapitalSource
and the Company do not achieve the perceived  benefits of the Merger as rapidly or to the
extent  anticipated by          financial or industry analysts; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
effect of the Merger on the combined companys financial results is not consistent
with the expectations of financial or industry analysts.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

# The Merger Agreement
limits our ability to pursue alternatives to the Merger.

The
Merger Agreement contains terms and conditions that make it more difficult for us to sell
our business to a party other than CapitalSource. These no shop provisions
impose restrictions on us that, subject to certain exceptions, limit our ability to
discuss or facilitate competing third-party proposals to acquire all or a significant part
of our company.

In
addition, our Board of Directors has agreed that it will not recommend a competing
acquisition proposal and that it will not withdraw or negatively modify the recommendation
that our stockholders vote for approval of the Merger Agreement, subject to limited
exceptions. While our Board of Directors could take such actions if it determined that the
failure to do so would violate its fiduciary duties, doing so would entitle CapitalSource
to terminate the Merger Agreement and would require us to pay CapitalSource a termination
fee. We will also be required to pay the termination fee if (1) a competing takeover
proposal meeting certain requirements is made to us or our stockholders or has been
publicly announced, (2) the Merger Agreement is terminated by CapitalSource or us because
the Merger has not been completed within nine months of signing and stockholder approval
has not been obtained, or because the stockholders do not approve the Merger at the
stockholder meeting, or the Merger Agreement is terminated by CapitalSource due to our
breach of the Merger Agreement, and (3) we complete or enter into a definitive agreement
with respect to an alternative transaction within 12 months of termination. These
provisions might discourage a third party that might have an interest in acquiring all or
a significant part of us from considering or proposing that acquisition even if it were
prepared to pay consideration with a higher per share market price than the current
proposed Merger consideration, and the termination fee might result in a potential
competing acquirer proposing to pay a lower per share price to acquire us than it might
otherwise have proposed to pay.

65

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# Item 2 
Unregistered Sales of Equity Securities and Use of Proceeds.

There are no matters required to be
reported under this item.

# Item 3  Defaults
Upon Senior Securities.

There are no matters required to be
reported under this item.

# Item 4  Submission
of Matters to a Vote of Security Holders.

There are no matters required to be
reported under this item.

# Item 5  Other
Information.

There are no matters required to be
reported under this item.

# Item 6  Exhibits.

The exhibits filed or incorporated as
part of this Form 10-Q are specified in the Exhibit Index.

66

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# SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                        | TIERONE CORPORATION                              
|----------------------- | -------------------------------------------------
|Date:  November 5, 2007 | By:/s/ Gilbert G. Lundstrom                      
|                        | Gilbert G. Lundstrom                             
|                        | Chairman of the Board and Chief Executive Officer
|Date:  November 5, 2007 | By:/s/ Eugene B. Witkowicz                       
|x                       | Eugene B. Witkowicz                              
|                        | Executive Vice President and                     
|                        | Chief Financial Officer                          

67

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# EXHIBIT INDEX

|No.  | Exhibits                                                                                          
|---- | --------------------------------------------------------------------------------------------------
|     |                                                                                                   
|31.1 | Section 302 Certification of the Chief Executive Officer                                          
|31.2 | Section 302 Certification of the Chief Financial Officer                                          
|32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|    

68