U.S. SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   Form 10-QSB

(Mark One)

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

For the quarterly period ended September 30, 1998
                               ------------------
                                       OR

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

For the transition period ____________________ to ____________________

Commission file number         0-12199

                           SOURCE CAPITAL CORPORATION
                           --------------------------
             (Exact name of registrant as specified in its charter)

          Washington                                   91-0853890
          ----------                                   ----------
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization)                      Identification No.)


               1825 N. Hutchinson Road, Spokane, Washington 99212
               --------------------------------------------------
                     (Address of principal executive office)


                                 (509) 928-0908
                                 --------------
                          (Issuer's telephone number)

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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

As of October 31, 1998, there were 1,350,679 shares of the Registrant's common
stock outstanding.

Transitional Small Business Disclosure Format (check One)  Yes____  No   X

                                       
<PAGE>
                           SOURCE CAPITAL CORPORATION

                                   Form 10-QSB
                    For the Quarter Ended September 30, 1998
                                  ------------

                                      Index
                                      -----
<TABLE>
<CAPTION>
                                                                                                             Page
                                                                                                             ----
<S>                                                                                                        <C>  
Part I - Financial Information

         Item 1 - Financial Statements:

                      -  Consolidated Balance Sheets - September 30, 1998 and December 31, 1997              1

                      -  Consolidated Statements of Income, Comprehensive Income and
                         Retained Earnings  Three and Nine Months Ended
                      -  September 30, 1998 and 1997                                                         2

                      -  Consolidated Statements of Cash Flows - Nine months
                         Ended September 30, 1998 and 1997                                                   3

                      -  Notes to Consolidated Financial Statements                                          4

         Item 2 - Management's Discussion and Analysis of
                         Financial Condition and Results of
                         Operations                                                                          6

PART II - Other Information                                                                                  10

</TABLE>

<PAGE>
                         Part I - Financial Information

Item 1.  Financial Statements

                           SOURCE CAPITAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                  ------------
<TABLE>
<CAPTION>


                                                                   September 30,              December 31,
                                                                           1998                      1997
                                                                           ----                      ----
                                                                      (Unaudited)
<S>                                                                  <C>                       <C>        
           ASSETS
Loans receivable, net                                                $33,972,482               $36,655,257
Leases receivable, net                                                11,620,089                 2,917,145
Accrued interest receivable                                              347,598                   345,424
Cash and cash equivalents                                                610,233                   473,551
Marketable securities (at market)                                        234,677                   250,724
Other real estate owned                                                  866,760                   556,342
Other assets                                                             880,265                   391,614
Deferred income tax                                                    1,482,360                 1,456,239
                                                                    ------------             -------------

Total assets                                                         $50,014,464               $43,046,296
                                                                    ============             =============

       LIABILITIES
Notes payable to bank                                               $ 27,333,593               $26,990,096
Mortgage contracts payable                                             3,158,208                 3,187,539
Accounts payable and accrued expenses                                    908,267                   512,792
                                                                    ------------             -------------

Total liabilities                                                     31,400,068                30,690,427
                                                                    ------------             -------------

Convertible subordinated debentures                                    6,000,000                      ----

       STOCKHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000
  shares authorized, none outstanding
Common stock, no par value, authorized 10,000,000
  shares; issued and outstanding, 1,355,679 and
  1,355,818 shares                                                     7,037,690                 7,038,802
Additional paid in capital                                             2,049,047                 2,049,047
Accumulated other comprehensive loss                                     (30,185)                  (27,143)
Retained earnings                                                      3,557,844                 3,295,163
                                                                    ------------             -------------

Total stockholders' equity                                            12,614,396                12,355,869
                                                                    ------------             -------------

Total liabilities and stockholders' equity                           $50,014,464               $43,046,296
                                                                    ============             =============
</TABLE>

                     The accompanying notes are an integral
                 part of the consolidated financial statements.

                                       1
<PAGE>
                           SOURCE CAPITAL CORPORATION
           CONSOLIDATED STATEMENTS OF INCOME, COMPREHENSIVE INCOME AND
                                RETAINED EARNINGS
         For the Three and Nine Months Ended September 30, 1998 and 1997
                                   (Unaudited)
                                  ------------
<TABLE>
<CAPTION>

                                                 Three Months ended September 30,         Nine Months ended September 30,
                                                      1998             1997                    1998             1997
                                                      ----             ----                    ----             ----
<S>                                               <C>               <C>                      <C>             <C>       
Financing income:
  Interest and fee income                         $1,319,294        $1,240,803               $4,056,124      $3,449,982
  Lease financing income                             454,898            54,883                  882,368          75,474
  Interest expense                                  (827,681)         (554,108)              (2,276,987)     (1,387,434)
                                                  ----------        ----------               ----------      ----------
    Net financing income                             946,511           741,578                2,661,505       2,138,022

Non-interest income:
  Gain on sales of investments,
    other assets and real estate                        ----            48,379                   87,640          48,557
  Provision for loan and lease losses                (53,000)          (13,000)                (109,000)        (13,000)
                                                  ----------        ----------               ----------      ----------
    Income before non-interest expenses              893,511           776,957                2,640,145       2,173,579

Non-interest expenses:
   Employee compensation and benefits                400,774           301,462                1,155,493         871,567
   Other operating expenses                          235,839           167,214                  716,624         492,811
                                                  ----------        ----------               ----------      ----------
Total non interest expenses                          636,613           468,676                1,872,117       1,364,378
                                                  ----------        ----------               ----------      ----------

Income before income taxes                           256,898           308,281                  768,028         809,201
Income tax provision:
  Current                                            (83,962)            4,125                 (188,400)       (109,500)
  Deferred                                            (3,638)         (111,125)                 (72,900)       (170,500)
                                                  ----------        ----------               ----------      ----------
     Total income tax provision                      (87,600)         (107,000)                (261,300)       (280,000)
                                                  ----------        ----------               ----------      ----------
         Net income                                  169,298          201,281                   506,728         529,201

Retained earnings, beginning of period             3,388,546         2,884,123                3,295,163       2,811,302
Dividends paid                                          ----              ----                 (244,047)       (255,099)
                                                  ----------        ----------               ----------      ----------
Retained earnings, end of period                  $3,557,844        $3,085,404               $3,557,844      $3,085,404
                                                  ==========        ==========               ==========      ==========

Net income per common share - basic                $     .12         $     .15                $     .37       $     .38
                                                  ==========        ==========               ==========      ==========
Net income per common share - diluted              $     .12         $     .15                $     .35       $     .38
                                                  ==========        ==========               ==========      ==========

Weighted average number of common shares
  outstanding:
    Basic                                          1,355,679         1,368,418                1,355,725       1,378,749
                                                  ==========        ==========               ==========      ==========
    Diluted                                        2,129,004         1,368,418                2,053,950       1,378,749
                                                  ==========        ==========               ==========      ==========
Cash dividends per share                                None              None                     $.18            $.18
                                                  ==========        ==========               ==========      ==========

Net income                                          $169,298          $201,281                 $506,728        $529,201
Other comprehensive income, net of tax:
   Unrealized gain (loss) on marketable 
     securities                                      (16,699)            2,037                   (2,008)         (6,894)
                                                  ----------        ----------               ----------      ----------
Comprehensive income                                $152,599          $203,318                 $504,720        $522,307
                                                  ==========        ==========               ==========      ==========

</TABLE>
                     The accompanying notes are an integral
                 part of the consolidated financial statements.

                                       2
<PAGE>

                           SOURCE CAPITAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
                                  ------------
<TABLE>
<CAPTION>

                                                                                 1998                      1997
                                                                                 ----                      ----
<S>                                                                        <C>                        <C>          
Cash flows from operating activities:
   Net income                                                              $     506,728              $     529,201
    Adjustments to reconcile net income to net
   cash provided by operating activities:
     Depreciation                                                                 34,145                     20,152
     Provision for loan and lease losses                                         109,000                     13,000
     Deferred income taxes                                                       (26,121)                    86,375
     Gain on sale of securities                                                     ----                     (4,559)
     Gain on sale of real estate                                                 (87,640)                   (43,998)
     Compensation associated with stock options granted                             ----                      8,800
     Change in:
       Accrued interest receivable                                               (20,143)                   (14,934)
       Other assets                                                             (434,164)                   163,705
       Accounts payable and accrued expenses                                     395,475                   (159,928)
                                                                            ------------               ------------
          Net cash provided by operating activities                              477,280                    597,814
                                                                            ------------               ------------

Cash flows from investing activities:
     Sale of investment securities                                                13,005                    477,176
     Loan originations                                                       (17,228,062)               (12,321,978)
     Loan repayments                                                          19,685,138                  6,051,369
     Direct financing lease originations                                     (11,035,922)                (2,442,496)
     Collections on direct financing leases                                    2,226,979                    445,752
     Capitalization of costs related to
      other real estate owned                                                     (1,611)                    (5,929)
     Proceeds from sale of other real estate and equipment                        19,500                    139,773
     Purchase of office equipment and vehicle                                    (88,632)                   (65,190)
                                                                            ------------               ------------
        Net cash used in investing activities                                 (6,409,605)                (7,721,523)
                                                                            ------------               ------------

Cash flows from financing activities:
     Proceeds from line of credit                                             26,345,616                 12,856,586
     Payments on line of credit                                              (26,002,119)                (4,686,632)
     Proceeds from sale of convertible subordinated debentures                 6,000,000                       ----
     Payments of long-term debt                                                  (29,331)                   (26,497)
     Payments for redemption of common stock                                      (1,112)                  (397,822)
     Cash dividends paid                                                        (244,047)                  (255,099)
                                                                            ------------               ------------
       Net cash provided by financing activities                               6,069,007                  7,490,536
                                                                            ------------               ------------

Net increase in cash and cash equivalents                                        136,682                    366,827
Cash and cash equivalents, beginning of period                                   473,551                     21,506
                                                                            ------------               ------------
Cash and cash equivalents, end of period                                    $    610,233               $    388,333
                                                                            ============               ============

Supplemental disclosure of cash flow information:
   Cash paid during the period for interest                                 $  2,301,217              $   1,319,380
   Cash paid during the period for income taxes                                  156,000                    398,825
   Non-cash financing and investing transactions:
    Financing sales of other real estate                                         292,993                    377,194
    Deferred interest on financing of real estate sold                            56,442                       ----
    Loans and accrued interest converted to repossessed assets                   458,218                    106,611
    Assets held for resale                                                        19,000                       ----

</TABLE>

                     The accompanying notes are an integral
                 part of the consolidated financial statements.

                                       3
<PAGE>
                           SOURCE CAPITAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.
------

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Source Capital Leasing Co. All significant
intercompany transactions and balances have been eliminated in consolidation.

The unaudited consolidated financial statements reflect all adjustments, which
in the opinion of management, are necessary to a fair statement for the periods
reported. Certain 1997 amounts have been reclassified to conform with the 1998
presentation. These reclassifications had no effect on the net income or
retained earnings as previously reported. The results of operations for the
nine-month period ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year. These unaudited financial statements
should be read in conjunction with the Company's most recent audited financial
statements for the year ended December 31, 1997.

NOTE 2.
------

The Company's provision for federal income taxes for the nine months ended
September 30, 1998 and 1997, is based on the statutory corporate income tax rate
of 34%. The actual current income tax liability to the Company for the year
ending December 31, 1998, is estimated to be significantly less than the amount
based on the statutory corporate tax rate, because of the effect of net
operating loss carryforwards from prior years.

NOTE 3.
------

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
Statement requires that comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise arising from non-owner sources. Unrealized gains and losses
on investment securities are reported as comprehensive income. This Statement
was adopted by the Company on January 1, 1998.

In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about
Segments for an Enterprise and Related Information. This Statement requires
public companies to report selected segment information in their quarterly and
annual reports issued to shareholders, and entity-wide disclosures about
products and services, and major customers. The Statement was adopted by the
Company on January 1, 1998.

In February 1998, the FASB issued SFAS No. 132, Employers' Disclosure about
Pensions and Other Post Retirement Benefits, which standardizes the disclosure
requirements for pension and other postretirement benefits. The adoption of SFAS
No. 132 is not expected to impact the Company's current disclosures.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires companies to recognize
all derivatives contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the

                                       4
<PAGE>
                           SOURCE CAPITAL CORPORATION

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

NOTE 3 - continued.
------------------

objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.

Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to affect its
financial statements.

NOTE 4.
------

On February 11, 1998, the Company sold $6,000,000 of Subordinated Convertible
Debentures. The Debentures bear interest at 7.5%, mature on March 1, 2008 and
are convertible into common stock at the rate of $8.01 per share. These
debentures were sold through a private placement to institutional investors. The
Company filed a registration statement on July 30, 1998 to register the shares
of common stock into which the debentures may be converted. The registration of
shares became effective on September 22, 1998. The debentures are convertible at
any time until maturity. Interest on the debentures is payable semiannually in
arrears each March 1 and September 1, commencing September 1, 1998. The
debentures are redeemable, in whole or in part at any time on or after March 1,
2001, at the option of the Company. The debentures are unsecured general
obligations of the Company subordinate in right of payment to all existing and
future senior indebtedness of the Company. Senior indebtedness includes, but is
not limited to, all current bank lines-of-credit and any future increases to
these lines as well as any new borrowings from financial institutions.

NOTE 5.
------

Net income per share - basic is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Net
income (after adjustment for the after-tax effect of interest on convertible
debentures) per share - diluted is computed by dividing net income by the
weighted-average number of common shares outstanding increased by the additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued.

Net income per share disclosures have been made in accordance with SFAS No. 128,
"Earnings per Share," which was applied by the Company in 1997. In accordance
with SFAS No. 128, all prior net income per share data has been restated to
conform to this presentation. See Exhibit 11.1 to the Consolidated Financial
Statements.

                                       5

<PAGE>
                           SOURCE CAPITAL CORPORATION

                         PART I - FINANCIAL INFORMATION
                         ------------------------------


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

General
-------

These discussions contain forward-looking statements containing words such as
"will continue to be," "will be," "continue to," "anticipates that," "to be," or
"can impact." Management cautions that forward-looking statements are subject to
risks and uncertainties that could cause the Company's actual results to differ
materially from those projected in forward-looking statements.

Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
--------------------------------------------------------------------------------
1997
----

For the nine months ended September 30, 1998 the Company reported net income of
$506,728 or $.35 per diluted common share. These results compare to net income
of $529,201 or $.38 per diluted share for the comparable period in 1997. Net
financing income (interest and lease income less interest expense) increased
from approximately $2,138,000 during the nine months ended September 30, 1997 to
$2,662,000 in the comparable period in 1998 (a 24.5% increase). Finance income
of $4,938,000 and $3,525,000 in the nine months ended September 30, 1998 and
1997 respectively represents an approximate average interest yield of 15.08% and
16.01% respectively, on the Company's average earning assets. Loans funded
during the first nine months of 1998 exceeded those funded during the comparable
period in 1997 by approximately $4,906,000, however loan repayments during the
1998 period exceeded those in the 1997 period by approximately $13,634,000. The
decrease in average interest yield in 1998 is primarily due to lower loan fees
earned on its real estate lending portfolio and non-performing loans during the
1998 period exceeding those in the comparable period in 1997. Lower than
expected loan originations combined with higher than expected loan repayments,
are directly related to increased competition from regional commercial banks.
The decrease in yield on the real estate portfolio is mitigated by a higher
interest rate received on the Company's lease portfolio. During the nine months
ended September 30, 1998 the Company's leasing subsidiary contributed
approximately $90,000 to net income as compared to an approximate $47,000 loss
in the 1997 comparable period.

The increase in financing income of approximately $524,000 is directly
attributable to the increase of approximately $10,000,000 in the Company's
average earning assets over the first nine months of 1997. The Company's average
earning asset portfolio grew from approximately $33,600,000 in the nine month
period ended September 30, 1997 to approximately $43,600,000 for the comparable
period ended September 30, 1998. The change in the portfolio is directly related
to the growth in the leasing portfolio which experience an $8,703,000 increase
over September 30, 1997. The increase in financing income was partially offset
by an approximate $890,000 increase in interest expense. The Company's cost of
funds on average borrowings decreased from approximately 9.3% for the first nine
months of 1997 to approximately 8.9% for the comparable period in 1998. The
Company was able to reduce its borrowing costs by funding a portion of its loan
portfolio using a "LIBOR" based rate, which is currently lower than the prime
based rate option. The Company funds its lease portfolio using a "LIBOR" based
rate which currently approximates prime less .9%. Loans and leases delinquent
more than 60 days equaled 4.2% of the loans and leases outstanding at September
30, 1998 as compared to approximately 1.3% at September 30, 1997. These loans
and leases are collateralized by deeds of trust and equipment. The Company's
allowance for probable loan and lease losses of approximately $324,000 is
considered adequate as of September 30, 1998.

                                       6
<PAGE>

Total non-interest expenses in the first nine months of 1998 increased
approximately 37.2% over the first nine months of 1997 primarily due to a 32.6%
increase in salaries and benefits as a result of an increase in personnel due to
the growth in the Company's leasing operations. Other operating expenses
increased by approximately 45.4% the most significant being an approximate
$102,000 increase in general and administrative expense which is directly
related to the growth of the Company's leasing activities. Additionally,
occupancy expense increased by approximately $35,000 as a result of expansion in
the Company's Spokane headquarters to facilitate the growth in leasing
operations, increased facilities in Seattle and the opening of its Phoenix,
Arizona office. The Company recognized a provision for probable loan and lease
losses of $109,000 for the nine months ended September 30, 1998, and $13,000 for
the comparable period in 1997.

The provision for income taxes of approximately $261,000 and $280,000 for the
nine months ended September 30, 1998 and 1997, respectively, is based upon the
statutory income tax rate of 34%. The Company expects to pay significantly less
current income tax than the estimated tax provision for the year ended December
31, 1998, due to the utilization of net operating loss carryovers. The Company's
effective tax rate for taxes paid in 1997 was approximately 23%.

Three Months Ended September 30, 1998 Compared to Three Months ended September 
------------------------------------------------------------------------------
30, 1997
--------

For the three months ended September 30, 1998, the Company reported net income
of $169,298 or $.12 per diluted common share. These results compare to net
income of $201,281 or $.15 per diluted share, for the comparable period in 1997.
Net financing income (interest and lease income less interest expense) increased
from approximately $742,000 during the three months ended September 30, 1997 to
approximately $947,000 in the comparable period of 1998 (a 27.6% increase).
Finance income of approximately $1,774,000 and $1,296,000 in the three months
ended September 30, 1998 and 1997 respectively, represents an approximate
average interest yield of 15.0% and 15.1%, respectively, on the Company's
average earning assets. The decrease in interest yield on the Company's real
estate portfolio is mitigated by a higher interest rate received on the
Company's lease portfolio. Lease income of approximately $455,000 resulted in an
average yield on lease contracts of 16.9% for the three-months ended September
30, 1998. Leasing income for the three month period ended September 30, 1997 was
not material and therefore not comparable.

The increase in financing income of approximately $479,000 is directly
attributable to the increase of approximately $12,444,000 in the Company`s
average earning assets over the third quarter of 1997. The Company's average
earning asset portfolio grew from $32,840,000 for the three months ended
September 30, 1997 to approximately $45,284,000 at September 30, 1998. Growth in
the loan and lease portfolio is directly attributable to the increase in lease
originations. Loans funded in the third quarter of 1998 were approximately
$7,503,000 as compared to approximately $4,185,000 in 1997, however loan
repayments in the third quarter were approximately $9,536,000 as compared to
approximately $583,000 in the third quarter of 1997. The Company's lease
portfolio continues to show strong growth as evidenced by a 45.4% increase in
net outstanding leases over the second quarter of 1998. The increase in
financing income was partially offset by an approximate $274,000 increase in
interest expense. The increase in interest expense is primarily attributable to
the increased borrowing related to growth in outstanding leases. The Company's
cost of funds on average borrowings decreased from approximately 9.4% at
September 30, 1997 to approximately 8.8% in the comparable period in 1998. The
Company was able to reduce its borrowing costs by funding a portion of its loan
portfolio using a "LIBOR" based rate, which is currently lower than the prime
based rate option. The Company also funds its lease portfolio using a "LIBOR"
based rate which currently approximates prime less .9%.

                                       7
<PAGE>

At September 30, 1998, the Company had approximately $1,905,000 of loans and
leases which were delinquent as to principal or interest more than 60 days, as
compared to approximately $755,000 at September 30, 1997. These loans and leases
are collateralized by deeds of trust and equipment. The Company's allowance for
probable loan and lease losses of approximately $324,000 is considered adequate
as of September 30, 1998.

Total non-interest expenses for the third quarter of 1998 increased
approximately 35.8% over the third quarter of 1997 primarily due to a 32.9%
increase in salaries and benefits resulting from added personnel (primarily
leasing) over the comparable period in 1997. Additionally, other operating
expenses increased by approximately 41% over the prior year, and provision for
probable loan and lease losses increased $53,000 during the third quarter of
1998 as compared with a $13,000 provision recorded for the same time period in
1997. Of the increase in other expense, the most significant was a $43,000
increase in general and administrative expense primarily related to the increase
in leasing activities. For the quarter ended September 30, 1998 the leasing
subsidiary contributed approximately $67,000 to earnings in the consolidated
financial statements as compared to an approximate $16,000 loss in 1997. There
were other increases and decreases in the Company's other operating expenses
none of which is material when considered individually.

Financial Condition and Liquidity
---------------------------------

At September 30, 1998, the Company had approximately $610,000 of cash and cash
equivalents as compared to approximately $474,000 at December 31, 1997. The
Company also had $235,000 of marketable securities at September 30, 1998, as
compared to approximately $251,000 at December 31, 1997. The Company's primary
sources of cash during the first nine months of 1998 were approximately
$26,346,000 from short term borrowings, $19,685,000 loan repayments, $6,000,000
from the sale of subordinated convertible debentures, (See Note 4 of Notes to
Consolidated Financial Statements), $2,227,000 repayments of lease receivables
and $477,000 from operations. The primary uses of cash during the first nine
months of 1998 were approximately $26,002,000 repayment of short term
borrowings, $17,228,000 of loan originations, $11,036,000 additions to direct
financing leases and $244,000 payment of dividends.

The Company's line of credit, which matures annually, was renewed and increased
to $40,000,000 on April 30, 1998. At September 30, 1998, the Company had
$18,760,000 outstanding under the line of credit. In addition, the Company's
wholly owned subsidiary, Source Capital Leasing Co., has a $12,000,000 line of
credit to fund its lease portfolio. The leasing company's line of credit also
renewed on April 30, 1998, and will mature April 30, 1999. During the third
quarter of 1998 the leasing line of credit was increased from $8,000,000 to
$12,000,000 The leasing company had approximately $8,574,000 outstanding under
its line of credit at September 30, 1998. The cash flows from the Company's
lines of credit, loan and lease repayments, and the existing cash, cash
equivalents and marketable securities are expected to be sufficient for the
operating needs of the Company.

Year 2000 Issues and Status
---------------------------

As the millennium approaches, the Company is addressing the impact of year 2000
(Y2K) on its information technology (IT) and non-IT functions. In preparation,
the Company determined its exposure to be limited to existing computer and
software vendors. Currently, the Company utilizes computer and software service
vendors for all of its loan and lease transactions, as well as its general and
subsidiary ledgers. The Company is preparing itself in two phases: (1)
identifying and resolving compliance issues and (2) testing the systems. The
Company has reviewed the compliance of its systems against the millennium issues
and obtained written confirmation of Y2K compliance from the system/software
vendors. All IT-related service vendors state they are compliant. Testing is in
process, but has not yet been completed. No additional third party relationships
exist that would have a material impact on the company and its operations as a
result of a Y2K compliance other than those noted. The Company's in-house 

                                       8
<PAGE>

system consists of a Windows NT server and independent workstations, utilizing
the Windows 95 operating system. The system was upgraded to its current level
during the second quarter 1998 to accommodate the Company's growth. The upgrade
was not to facilitate and resolve the Y2K issue. The Company does not expect to
incur significant costs to ensure Y2K compliance.

The Company's exposure to a non-compliant system is considered minimal. System
and software vendors utilized by the Company are nationally known and reputable
service providers that offer these and similar services to many subscribers. The
Company does not believe it is reasonable to assume a collapse of the entire or
significant portion of its computer system as a result of a Y2K issue. Should
the entire system or major component fail as a result of a Y2K compliance issue,
the Company maintains adequate historical records that would enable
reconstruction and maintenance of loan and lease information manually until the
system is corrected.

New Accounting Pronouncements
-----------------------------

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
Statement requires that comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise arising from non-owner sources. This Statement was adopted
by the Company on January 1, 1998. Unrealized gains and losses on investment
securities are reported as comprehensive income.

In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about
Segments for an Enterprise and Related Information. This Statement requires
public companies to report selected segment information in their quarterly and
annual reports issued to shareholders, and entity wide disclosures about
products and services and major customers. The statement was adopted by the
Company on January 1, 1998.

In February 1998, the FASB issued SFAS No. 132, Employers' Disclosure about
Pensions and Other Post Retirement Benefits, which standardizes the disclosure
requirements for pension and other postretirement benefits. The adoption of SFAS
No. 132 is not expected to impact the Company's current disclosures.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.

Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to affect its
financial statements.

Effect of Inflation and Changing Prices
---------------------------------------

Interest rates on the Company's loan portfolio are subject to inflation as
inflationary pressures affect the prime interest rate. At September 30, 1998,
interest rates on approximately 91.2% of the Company's loan portfolio were
variable based on prime or other indexes. The remaining loans have fixed
interest rates. Loans with fixed rates and maturities of less than one year at
September 30, 1998 are considered variable. At September 30, 1998 all leases in
the Company's lease portfolio carry fixed interest rates, however, the Company's
line-of-credit with Seafirst Bank provides for match fixed rate funding of
leases. Each lease is funded separately and the interest rate charged by the
bank is fixed for the term of the advance which is matched to the term of the
lease.

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<PAGE>

                           SOURCE CAPITAL CORPORATION


                           PART II - OTHER INFORMATION
                           ---------------------------


Items 1,2,3,4 and 5  of Part II are omitted from this report as they are either 
inapplicable or the answer is negative.


Item 6.  Exhibits and Reports on Form 8-K
-----------------------------------------

     (a)  Exhibits

         11.1 Statement regarding Computation of Per Share Earnings

         27.1 Financial Data Schedule

     (b)  Reports on Form 8-K

         The following reports on Form 8-K were filed for the three months ended
         September 30, 1998:


         Form 8-K Report dated July 27, 1998 - Item 4 - Changes in registrant's
certifying accountants.









          (The balance of this page has been intentionally left blank.)

                                       10

<PAGE>



                           SOURCE CAPITAL CORPORATION

                                   SIGNATURES
                                  ------------



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


                                       SOURCE CAPITAL CORPORATION
                                       --------------------------
                                            (Registrant)



Date: November 09, 1998           By: /s/ D. Michael Jones
      ------------------------        --------------------
                                       D. Michael Jones
                                       President and Chief Executive Officer




Date: November 09, 1998           By: /s/ Lester L. Clark
      ------------------------        -------------------
                                       Lester L. Clark
                                       Vice President-Secretary/Treasurer
                                       Principal accounting and finance officer




                                       11