The amount in column (1) is to be included as dividend income on your tax return and 100% of this amount is Qualified Dividend Income and qualifies for the 5% and 15% capital gains rates..  

In accordance with the provisions of the Internal Revenue Code, the amounts in column (2) are long term capital gain distributions and qualifies for the 5% and 15% capital gains rates.

A Form 1099 has been mailed to all shareholders of record on dividend record dates setting forth the specific amounts to be included in their 2007 tax returns. For corporate shareholders, 100% of the amount in column (1) qualifies for the 70% corporate dividends received deduction. Source Capital did not elect to retain any undistributed long-term capital gains for the year ended December 31, 2007. Therefore, Common shareholders will not receive a Form 2439 for 2007.

The information above shows the cash distributions paid by Source Capital during 2007. When additional shares are issued by Source Capital under the Automatic Reinvestment Plan at a discount from the market price, a participant in the Plan is treated for federal income tax purposes as having received a taxable distribution equal to the market value of the shares purchased. In effect, the discount from market price at which shares are purchased is added to the amount of the cash distribution to determine the total value of the taxable distribution. Such value also becomes the participant's tax basis for the shares purchased under the Plan.

The first three distributions paid during the year were reinvested at a discount from the market price and the additional taxable amount of these distributions for each Common share purchased is as follows: March 15, 2007, $3.3325 per share; June 15, 2007, $0.5600 per share; September 15, 2007, $1.2200 per share.

None of the amounts reported in column (1) were derived from U.S. Treasury Securities.

Certain states have reduced tax rates for capital gains attributed to securities that meet certain holding periods. The following percentages should be applied to the amounts in column (2): 6.5% of these gains were derived from assets held 1-2 years, 57.1% 2-3 years, 13.6% 3-4 years, 10.9% 4-5 years, 9.6% 5-6 years, and 2.3% more than 6 years.