SOURCE CAPITAL /DE/ — Regulatory Filings 2002

May 28, 2002

[SOURCE CAPITAL LOGO] SOURCE CAPITAL, INC. FIRST QUARTER REPORT March 31, 2002 OFFICERS AND DIRECTORS [SOURCE CAPITAL LOGO] SOURCE CAPITAL, INC. DIRECTORS Willard H. Altman, Jr. Wesley E. Bellwood Eric S. Ende David Rees Paul G. Schloemer Lawrence J. Sheehan OFFICERS Eric S. Ende, PRESIDENT AND CHIEF INVESTMENT OFFICER Steven R. Geist, SENIOR VICE PRESIDENT AND FIXED-INCOME MANAGER J. Richard Atwood, TREASURER Sherry Sasaki, SECRETARY Christopher H. Thomas, ASSISTANT TREASURER INVESTMENT ADVISER First Pacific Advisors, Inc. 11400 West Olympic Blvd., Suite 1200 Los Angeles, California 90064 CUSTODIAN State Street Bank and Trust Company Boston, Massachusetts COUNSEL O'Melveny & Myers LLP Los Angeles, California TRANSFER AND SHAREHOLDER SERVICE AGENT Mellon Investor Services LLC 85 Challenger Road Overpeck Centre Ridgefield Park, NJ 07660 (800) 279-1241 or (201) 329-8660 REGISTRAR Mellon Investor Services LLC Ridgefield Park, New Jersey STOCK EXCHANGE LISTING New York Stock Exchange: Symbols: SOR Common Stock SOR+ Preferred Stock LETTER TO SHAREHOLDERS INVESTMENT RESULTS Source Capital's total net assets increased to $521,303,592 from $498,725,575 at year-end. Net asset value per Common share increased to $58.07 at March 31, 2002 from $55.45 at year-end. In addition, a distribution of $1.15 was paid on the Common shares during the quarter. During this quarter, Source Capital's net asset value per share of Common Stock increased 7.0% while total net assets rose 6.4%, with both figures reflecting reinvestment of dividends and distributions paid during the period. These changes compare with a 3.7% increase during the quarter for the Russell 2500 Index, also on a reinvested basis. NET INVESTMENT INCOME Net investment income decreased during the quarter to $818,898 from $1,505,765 in the first quarter of 2002. After providing for Preferred dividends, net investment income per Common share amounted to $(0.05) compared to $0.04 in the prior year. DISTRIBUTIONS TO COMMON SHAREHOLDERS A regular quarterly distribution at the rate of $1.15 per share was paid on March 15, 2002 to shareholders of record on February 22, 2002. Source's 10% Distribution Policy, adopted in 1976, calls for payments to Common shareholders approximating 10% of the Common Stock's ongoing net asset value. Shareholders are reminded that these payments substantially exceed the Company's net investment income and thus represent a continuing payment of a portion of the Company's capital. As we repeatedly point out, maintenance of the current $4.60 Common distribution rate is dependent upon achieving total investment results which will sustain a net asset value of approximately $46.00. PREFERRED DIVIDENDS The regular Preferred dividend of $0.60 per share was paid on March 15, 2002 to shareholders of record on February 22, 2002. The increase in the Company's total net assets so far this year has led to an increase in the Preferred shares' asset coverage from 921% at year-end 2001 to 963% at March 31, 2002. The decline in net investment income in the first quarter decreased Preferred dividend coverage to 69% compared to 127% in the first quarter of 2001. MARKET PRICE OF SOURCE CAPITAL SHARES The market price of Source Capital Common Stock increased during the quarter from $61.02 at year-end 2001 to $66.40 at March 31, 2002. As this $5.38 increase in market price was more than the $2.62 rise in net asset value during the period, the market premium to net asset value of 10.1% at year-end 2001 increased to 14.3% at March 31, 2002. The market price of Source Capital Preferred Stock increased during the quarter from $30.20 at year end 2001 to $30.50 at March 31, 2002. COMMENTARY In the shareholder letter included in the Source Annual Report, we uncharacteristically went out on a limb and forecast a year of indifferent performance for the stock market, citing the enormous gains of the fourth quarter as already having discounted the likely improvement in the economic environment in 2002. Having completed the first quarter and, as of this writing, April as well, we are unclear whether our forecast is proving to be correct or not. The problem is, we neglected to specify which stock market would be struggling to stay above water. Although the S&P 500 and Nasdaq continue with their miserable performance of 2001, declining by 6% for the S&P and by 13% for the Nasdaq (both through April 30), the small stock Russell 2000 is performing a good deal better, gaining 5% for the first four months. Fortunately, as shown in the table below, Source Capital has outperformed both the big stocks and the small stocks in the first quarter, as well as for longer periods (though not shown, data through April 30 would show similar relative performance).

• Annualized Returns Although Source has not owned very many bank stocks in recent years, we are willing to own more if they have the right characteristics. What we are looking for is high returns on capital, strong balance sheets, pristine credit quality, a low cost structure, and the ability to generate internal growth. One bank which has combined all these attributes is NATIONAL COMMERCE FINANCIAL (NCF). NCF is best known as the leading proponent of supermarket-based branches, locating about two thirds of its branches inside supermarkets to take advantage of the high traffic and low overhead costs. It supplements those offices with conventional branches in a "hub and spoke" pattern, permitting it to effectively serve both retail and business customers. Because of its many years of exemplary performance, NCF had unfortunately long sold at a high valuation. We were admirers from a distance. Then in 2000, NCF broke one of Wall Street's cardinal rules. It proposed a merger of equals with a North Carolina bank named CCB. Wall Street was wary of bank mergers of equals, and justifiably so, because of repeated failures to successfully deliver the results promised. Instead of economies of scale and accelerated revenue growth, investors had seen cost savings overstated, synergies non-existent, disruptive systems conversions, and management culture clashes. As a result of these frequent failures, instead of celebrating these merger of equals announcements, Wall Street would run for the exits. Such was the case after the NCF-CCB merger announcement in March 2000. The stock declined to $15 per share, over 40% below its high of a few months earlier, going from a premium valuation to that of a run-of-the-mill bank. We had an opportunity to spend some time with both banks' managements soon after the merger announcement and became convinced that this time things would be different. We found that their consolidation plans were carefully developed, the geographic footprints of the banks highly complementary, and their areas of strength -- NCF in retail banking and CCB in small and middle-market business -- were highly synergistic. Equally important, their managements would clearly work well together. We purchased about 500,000 shares at an average cost of $16 per share, just 13x estimated year 2000 earnings. It is now two years after the merger was first announced. The consolidation has proceeded smoothly. Earnings have improved each quarter. The company recently announced its entry into the large Atlanta market, opening the first of 30 planned in-store branches in Kroger supermarkets. At a recent price of $27 per share, NCF is trading at about 15x estimated year 2002 cash earnings, a good recovery from its lows, but well below the valuation of other high-performing banks. We expect to see it continue in Source's portfolio for many years to come. Respectfully submitted, /s/ Eric S. Ende Eric S. Ende President and Chief Investment Officer May 7, 2002 MAJOR PORTFOLIO CHANGES Quarter Ended March 31, 2002

COMPOSITION OF TOTAL NET ASSETS* March 31, 2002

SUMMARY FINANCIAL INFORMATION*

• THE FINANCIAL INFORMATION INCLUDED IN THIS REPORT HAS BEEN TAKEN FROM THE RECORDS OF THE COMPANY WITHOUT EXAMINATION BY INDEPENDENT AUDITORS. SECURITIES ARE CARRIED AT MARKET VALUE. SOURCE CAPITAL, INC. 11400 West Olympic Boulevard, Suite 1200 Los Angeles, California 90064