> FreeBSD 7.0-STABLE #1
if you are talking about the string displayed by the kernel during booting then #1 is a count of the number of times that the kernel has been (re)built.
> if the source is at #2 I will update my source tree and buildworld, but I do not know where to look to find out which '#' it is.
7.0-STABLE is a development branch (in
SCM speak) which is constantly updated and has no # (actually there is - its called a RELEASE
).
(caveat: the above said may not be 100% correct. since i don't know the specifics of fbsd development.)