Investment Company Act file number

811-1731

Source Capital, Inc.

(Exact name of registrant as specified in charter)

11400 West Olympic Boulevard, Suite 1200, Los Angeles, California

90064

(Address of principal executive offices)

(Zip code)

J. Richard Atwood, Treasurer, Source Capital, Inc.,
11400 West Olympic Boulevard, Suite 1200, Los Angeles, California 90064

(Name and address of agent for service)

Registrant's telephone number, including area code:

(310) 473-0225

Date of fiscal year end:

December 31

Date of reporting period:

September 30, 2006

COMMON STOCKS

Shares or
Principal
Amount

Value

BUSINESS SERVICES & SUPPLIES — 22.2%

Brady Corporation

421,600

$

14,823,456

CDW Corporation

353,900

21,828,552

Charles River Laboratories International, Inc.*

455,000

19,751,550

CLARCOR Inc.

320,000

9,756,800

Copart, Inc.*

170,000

4,792,300

Invitrogen Corporation*

270,000

17,120,700

Manpower Inc.

300,000

18,381,000

ScanSource, Inc.*

850,000

25,780,500

$

132,234,858

PRODUCER DURABLES — 15.7%

Franklin Electric Co., Inc.

66,100

$

3,512,554

Graco Inc.

495,000

19,334,700

HNI Corporation

352,300

14,648,634

IDEX Corporation

495,000

21,309,750

Oshkosh Truck Corporation

360,000

18,169,200

Zebra Technologies Corporation (Class A)*

465,000

16,619,100

$

93,593,938

RETAILING — 10.5%

CarMax, Inc.*

700,006

$

29,197,250

O’Reilly Automotive, Inc.*

1,000,000

33,210,000

$

62,407,250

ENERGY — 10.1%

Helix Energy Solutions Group, Inc.*

695,000

$

23,213,000

Noble Corporation

460,000

29,522,800

Tidewater Inc.

165,000

7,291,350

$

60,027,150

TECHNOLOGY — 9.9%

Cognex Corporation

720,000

$

18,187,200

Maxim Integrated Products, Inc.

180,000

5,052,600

Microchip Technology Incorporated

340,000

11,022,800

Plantronics, Inc.

751,100

13,166,783

SanDisk Corporation*

215,000

11,511,100

$

58,940,483

HEALTH CARE — 7.2%

AmSurg Corporation*

320,500

$

7,134,330

Bio-Rad Laboratories, Inc.*

200,300

14,167,219

Health Management Associates, Inc.

250,100

5,227,090

Lincare Holdings Inc.*

465,000

16,107,600

$

42,636,239

FINANCIAL — 4.7%

Brown & Brown, Inc.

580,000

$

17,724,800

First American Corporation

235,000

9,949,900

$

27,674,700

TRANSPORATION — 4.5%

Heartland Express, Inc.

992,300

$

15,559,264

Knight Transporation, Inc.

675,000

11,441,250

$

27,000,514

ENTERTAINMENT — 4.2%

Carnival Corporation

536,600

$

25,236,298

CONSUMER DURABLES — 2.3%

Briggs & Stratton Corporation

58,400

$

1,608,920

Polaris Industries Inc.

295,000

12,139,250

$

13,748,170

TOTAL COMMON STOCKS — 91.3% (Cost $341,715,092)

$

543,499,600

PREFERRED STOCKS

REAL ESTATE INVESTMENT TRUST

CBL & Associates Properties, Inc.

100,000

$

2,590,000

Duke-Weeks Realty Corp. (Series B)

40,000

2,050,000

Pennsylvania Real Estate Investment Trust (Series A)

59,000

3,256,800

ProLogis (Series G)

120,000

3,000,000

TOTAL PREFERRED STOCKS — 1.8% (Cost $10,179,446)

$

10,896,800

CONVERTIBLE BONDS AND DEBENTURES TECHNOLOGY

BEA Systems, Inc. — 4% 2006

$

2,000,000

$

1,990,000

International Rectifier Corp. — 4.25% 2007

2,000,000

1,965,000

LSI Logic Corporation — 4% 2006

2,000,000

1,997,500

TOTAL CONVERTIBLE BONDS AND DEBENTURES — 1.0%
(Cost $5,810,000)

$

5,952,500

NON-CONVERTIBLE BONDS AND DEBENTURES CORPORATE — 4.3%

Central Garden & Pet Company — 9.125% 2013

$

3,000,000

$

3,120,000

Host Marriott Corporation — 9.25% 2007

2,000,000

2,077,500

JLG Industries, Inc. — 8.25% 2008

2,000,000

2,060,000

Manitowoc Company, Inc., The — 10.5% 2012

1,300,000

1,408,875

Metaldyne Corporation — 11% 2012

2,000,000

1,795,000

OM Group, Inc. — 9.25% 2011

4,000,000

4,180,000

Orbital Sciences Corporation — 9% 2011

3,000,000

3,195,000

PolyOne Corporation — 10.625% 2010

950,000

1,026,000

Realty Income Corporation — 8.25% 2008

2,000,000

2,083,200

Unisys Corporation — 7.875% 2008

1,500,000

1,503,750

Windmere Durable Holdings Inc. — 10% 2008

3,000,000

3,000,000

$

25,449,325

U.S. GOVERNMENT AND AGENCIES — 0.0%

Federal Home Loan Mortgage Corporation — 6.5% 2023 (Interest Only)

$

30,644

$

1,197

Government National Mortgage Association (Mobile Home) — 9.75% 2010

180,947

190,107

$

191,304

TOTAL NON-CONVERTIBLE BONDS
AND DEBENTURES — 4.3% (Cost $25,220,863)

$

25,640,629

TOTAL INVESTMENT SECURITIES — 98.4% (Cost $382,925,401)

$

585,989,529

SHORT-TERM INVESTMENTS — 1.6% (Cost $9,368,215)

Short-term Corporate Note:

Rabobank USA Financial Corporation — 5.35% 10/2/06

$

9,371,000

$

9,368,215

TOTAL INVESTMENTS — 100.0% (Cost $392,293,616)(A)

$

595,357,744

Other assets and liabilities, net — 0.0%

233,237

TOTAL NET ASSETS — 100.0%

$

595,590,981

(A) The cost stated also approximates the aggregate cost for Federal income tax purposes. Net unrealized appreciation consists of:

Gross unrealized appreciation:

$

212,486,559

Gross unrealized depreciation:

(9,422,431

)

Net unrealized appreciation:

$

203,064,128

(a)

The principal executive officer and principal financial officer of the registrant have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) are effective based on their evaluation of the disclosure controls and procedures as of a date within 90 days of the filing date of this report.

(b)

There have been no significant changes in the registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controls over financial reporting.

(a)

Separate certification for the registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the Investment Company Act of 1940. Attached hereto.

By:

/s/ ERIC S. ENDE

Eric S. Ende, President

By:

/s/ J. RICHARD ATWOOD

J. Richard Atwood, Treasurer