Abstract: Lacustrine source rocks in the South-5 Sag of South Yellow Sea Basin were studied based on lithology, geochemistry, paleontology, seismic facies and the data from boreholes. The lacustrine source rocks were formed in saline water during the expanding stage of the lake. They occur almost everywhere in the South-5 Sag including the lake center and the slope. The source rocks in the Funing Formation are thick enough to generate hydrocarbons hypothetically. On the other side, the lake water was salty or brine during the source rock was formed in the period of Palaeocene. The water salinity came from sea water invation, documented by the evidence from geochemistry, paleontology and limestone. Data suggests that hydrocarbon generation of the lacustrine source rock of the Funing Formation is earlier than those from the source rocks in other basins due to its particular forming environment. The recognition of the saline lacustrine source rocks is very important for evaluating the resource potential of the sag or even the whole basin.