Semi-Annual Report

JUNE 30, 2010

First Eagle Variable Funds

Overseas Variable Fund

ADVISED BY FIRST EAGLE INVESTMENT MANAGEMENT, LLC

Forward-Looking Statement Disclosure

One of our most important responsibilities as mutual fund managers is to communicate with shareholders in an open and direct manner. Some of our comments in our letters to shareholders are based on current management expectations and are considered "forward-looking statements". Actual future results, however, may prove to be different from our expectations. You can identify forward-looking statements by words such as "may", "will", "believe", "attempt", "seem", "think", "ought", "try" and other similar terms. We cannot promise future returns. Our opinions are a reflection of our best judgment at the time this report is compiled, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise.

Table of Contents

Letter from the President

Dear Shareholders,

After a year which concluded with strong performance across world equity markets, investors entered 2010 with a sense of optimism and faith in the stability of the global financial system. However, the complacent environment of low volatility and advancing share prices was rudely interrupted with the prospect of sovereign defaults in Southern Europe and a deterioration of the euro. Although the latest debt crisis should not be viewed as surprising, it is a reminder that the credit bubble will continue to haunt global economies. There is no quick and easy fix.

With the one trillion euro support package, a bruised, if not crippled Eurozone, pending financial reform and fragile trade imbalances, uncertainty and fear have returned to equity markets.

At First Eagle we do not speculate on potential economic developments or on future market movements. Rather, we scour the universe to uncover what we feel are good businesses whose shares can be acquired at prices which we believe afford us a margin of safety. We are mindful of and respectful of the macro environment and we try to factor every conceivable (and sometimes inconceivable) risk into our investment decisions. And volatility, which can provide opportunity, is our friend.

Our mission has never changed through the many ups and downs over the decades—we act as the stewards of our clients' capital and we are committed to our goal of preserving the purchasing power of this capital over time.

With portfolio managers Matt McLennan and Abhay Deshpande working alongside Bruce Greenwald as Director of Research, Jean-Marie Eveillard in his capacity as Senior Adviser and a team of eleven additional analysts, we are confident that we have an excellent investment team to guide us through uncharted territories.

John P. Arnhold

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In December of last year, the adviser to the Fund, Arnhold and S. Bleichroeder Advisers, LLC, announced its new corporate name, First Eagle Investment Management, LLC ("FEIM"). The change reflects the Firm's exclusive commitment to asset management and the strong value our shareholders rightly associate with the First Eagle Funds and the First Eagle Variable Funds.

Please be assured that your investment in our Fund will continue to be managed in the same diligent manner as it has been. We are grateful for the confidence that you continue to place in our Firm.

Sincerely,

John P. Arnhold

President

August 2010

Past performance is no guarantee of future results. The portfolio is actively managed. The portfolio and opinions expressed herein are subject to change. Current and future portfolio holdings are subject to risk.

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Letter from the Global Value Team Portfolio Managers

The public's appetite for deflation is limited. Who desires it in a world of fixed nominal debt? Deflation, and our system of populist democracy with a fiat money architecture, is like oil and water. Yet we are in a squeeze. Were gold money, we'd likely be seeing deflation in parts of the manufacturing economy. There is not only cyclical excess capacity, but a secular decline in labor intensity due to both technology and cheap substitute labor from Asia. Excess capacity is pressuring real incomes for the blue collar worker in developed economies, whether they're in Detroit or in Greece. This negative impact on wages is further exacerbated by rising energy prices and a growing tax burden to fund the redistributional demands of an aging demographic. Pressure on real disposable incomes of the average worker would no doubt, in a world where gold were money, have pressured demand from this segment of the population and had a multiplier effect rippling throughout the economy. Yet the last vestiges of metallic backing for currency have long since gone as the central banks and governments have tried to address this deflationary pulse by doing "whatever it takes" to keep the stock of money growing—namely substituting government debt for private sector debt. What is the value of something in potentially infinite supply?

The Austrian economists sound a warning on such policies. Von Mises warned that one cannot make all people truly wealthier by printing money. This seems self evident, yet today monetary expansionism is conducted under the cloak of responsible economic policy on a global basis. The result, in our opinion, is that the price of money is fake: short-term interest rates are negative in real terms; long-term government bond yields are being partially supported by direct central bank purchases; risky bank debt was state guaranteed; exchange rate pegs are being blindly adhered to despite major imbalances. When the price of money is fake, mal-investment and real economic dislocation may follow.

While much of the recent media attention has been on the excess of the last U.S. credit cycle, liberal monetary trends have been more broadly based. For example, China is arguably one of the greatest monetary experiments of all time. The stock of Chinese M2 in dollar terms has grown over six fold in the past decade. Whether they are ignorant, indifferent or appreciative of this fact, many respected pundits continue to laud China's "effective" centralized policy management. There is substance to the assertion that China has and can still play productivity catch-up by improving property rights and by investing in cities, roads and routers. But why is it that China with one fifth the world's population and a below average Gross Domestic Product ("GDP") per capita has suddenly

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Letter from the Global Value Team Portfolio Managers (continued)

become the source of the world's marginal bid for platinum jewelry, first growth Bordeaux, Antwerp diamonds and high-end New York condos? Why is China close to half the world's installed cement and steel capacity without any real advantage in the required raw materials? Could it be because the price of money is fake?

Why did the euro trade at $1.50 when the real purchasing power of its constituent currencies (not just the deutschemark but the franc, lira, peseta, drachma, etc.) had averaged closer to $1.20 over the prior two decades, when there was no meaningful interest rate carry to the dollar and where the Eurozone had dipped into a current account deficit position like its American counterpart? Could it have been forced reserve accumulation as a second order consequence of the fake price of money in pegged currency regimes? In the spirit of keeping the price of money fake, European governments have decided to prop up Greek government debt, even though a restructuring would impose fiscal discipline on other would-be-offenders lest they suffer the same fate. A restructuring would have also reminded the banks, who "arbed" the higher Greek yields, that a higher yield is often a return of capital, not a return on capital. Why did the central bank feel compelled to intervene to correct market pricing? We have made great strides in opening up the world economy and in the diffusion of property rights and technology so the scope for a market based system has never been broader, but we are frequently reminded of the parallel and growing market distortion from governments.

As we survey the globe, the aftermath of the financial crisis has produced fiscal deficits around the developed world that are larger as a percentage of GDP than the trend growth rate of nominal GDP in those economies, which means that without tough adjustment we are, in our view, on an unsustainable policy course. We live in a world of negative real rates borne out of a lack of political will for deflationary adjustment, but we believe there is now a further backlog of deflationary fiscal adjustment to come if the political will exists and inflationary adjustment if it doesn't. Either way, it may be a long time before money earns an attractive real return. Is it any surprise that gold, which some view as nature's currency, which cannot be printed, has appreciated recently relative to paper money?

So what are we to do in a world of "State Capitalism" dominated by G7 Keynesian largesse, OPEC oil supply constraints and Chinese single party monetary experimentalism with rising political tensions from an underlying real squeeze on the average worker? Is it a lost cause?

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Pictured: (from left to right) Abhay Deshpande, Matthew McLennan and Jean-Marie Eveillard

Well it ain't all bad! Growth in productivity, the fruit of business endeavor, helps absorb these imperfections over time. Whether it absorbs all of them and more we have no idea. History gives us hope in this regard, but it also teaches us that the river can meander before it reaches the sea. Monetary and fiscal stimulus measures have been undertaken to "kick the can down the road" in the hope that productivity buffers the adjustment over time. Fortunately, productivity, at least from a bottom-up stand point, looks pretty good right now. Corporations around the world prepared for Great Depression II. They slashed operating expenses, capital expenditures and working capital levels in anticipation of big sales declines, but the top line fell somewhat less than expected due to both the stimulus and a normalization of consumer confidence. The favorable gap between revenues and outgoings has produced dramatic margin and free cash flow improvement from a depressed base. Corporate profits are the kernel of sustainable economic recovery as they fuel investment and hiring; they fuel growing intrinsic value for equities and declining debt spreads; they fuel higher corporate rents and real estate values. Further to this, increased profits and the resultant increase in wages and capital gains will drive better tax revenues and will meaningfully help abate the current fiscal deficits in the advanced world. Policy stimulus is an amortization of economic pain, not a miracle drug. Productivity and the related rebound of corporate profits provide the key potential buffer to help absorb what will need to be a prudent policy tightening at some point in the future. Were it not for the strong recent free cash flow performance of business around the world, one would be far more worried about the coming policy adjustment.

Perhaps counter-intuitively, we have seen equities (carefully selected) as the least worst alternative in a world of fake money as they represent real claims on real businesses which are the source of productivity required to solve our problems. To the extent that many of the businesses we own today are held at single digit multiples of what we believe are their sustainable operating profits, we have the opportunity for high single digit free cash flow yields and participation in the growing "nominal" stream of world activity. This stacks up well relative to bonds in our view.

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Letter from the Global Value Team Portfolio Managers (continued)

However, as markets rallied substantially off their lows, our cash and short-dated government bond positions have built to a mid-teens level as a percent of our portfolio. This is not us being enamored with the return available on such paper but rather our discipline to trim or sell some of our positions approaching what we feel is intrinsic value and a recognition that it has become harder, though not impossible, to find good businesses at good prices. The cash is a residual of our investment approach and a reflection of our patience as we acknowledge that in a complex world, with so many counteracting forces, there will be panics to take advantage of in future years.

We continued to hold gold at a low double digit percentage of the portfolio during the period via both bullion and equities as a potential store of value which is independent of the all too human financial architecture. The unorthodox actions by the Federal Reserve Bank, the European Central Bank and People's Bank of China have led people to question the stability of our fiat money architecture. Investors' faith in the security of principal for their cash held in banks and in government obligations has weakened in response to bank failures and anticipated sovereign restructurings. Gold's value has been bid up inversely to that erosion of faith—bid up to levels where it now faces principal risk too in our view. We urge caution as gold may not always glitter from current levels and as such our allocation to gold should not be construed as a directional bet. Rather, we recognize that gold has moved to a higher price given the backdrop, and gold has the potential to counterbalance to a portfolio predominantly invested in man-made enterprise.

Our team of analysts is working hard to uncover businesses that look like eclectic royalties on a slice of global activity that will endure if not expand over time; to find scarce real assets that will keep pace with if not exceed the inflationary tendency and that we aim to buy cheaper through the equity market than through the physical commodity markets; and to identify discounted securities by virtue of the gap between economic earnings and GAAP earnings resulting from complexities such as holding company structures, insurance float or asset run-off dynamics. This is how it should be when prices are neither bargain nor bubble—good old fashioned analysis, discriminating questioning and hard work will make the difference. What we're looking for is a margin of safety at the bottom up level given the lack of obvious mispricing at the top-down level. What we're looking for is business resilience in a world of macro

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Letter from the Global Value Team Portfolio Managers (continued)

turbulence. This must be done security by security—there is no shortcut index, swap, derivative or CDS instrument that will get us there. But that's how we like it!

August 2010

Past performance is no guarantee of future results. The portfolio is actively managed. Current and future portfolio holdings are subject to risk.

There are risks associated with investing in funds that invest in securities of foreign countries, such as erratic market conditions, economic and political instability and fluctuations in currency exchange rates. Investment in gold and gold related investments present certain risks, and returns on gold related investments have traditionally been more volatile than investments in broader equity or debt markets.

The commentary represents the opinion of the Global Value Team Portfolio Managers as of August 2010 and is subject to change based on market and other conditions. These materials are provided for informational purpose only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. The views expressed herein may change at any time subsequent of the date of issue hereof. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security.

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Management's Discussion of Fund Performance

Global markets fell sharply in the first half of 2010 as investors grew increasingly concerned about the sovereign debt crisis in Europe and the economic, fiscal and regulatory challenges facing many regions. The Nikkei 225 Index fell 11% during the six-month period. The French CAC 40 Index fell 12.5% while the German DAX was unchanged over the six-month period. The MSCI World Index fell 9.8% during the period while in the U.S., the S&P 500 Index fell 6.7%. Crude oil fell almost 5% to $76 a barrel, and gold rose 13% to $1,242 an ounce. The U.S. dollar rose 17% against the euro but it fell 4.3% against the yen.

First Eagle Overseas Variable Fund

The net asset value ("NAV") of the Fund's shares declined 0.37% for the six-month period compared to the MSCI EAFE Index which fell 13.23% during the period. The Fund's cash and commercial paper position was 15.67% on June 30, 2010.

The five largest contributors to the performance of First Eagle Overseas Variable Fund over the period were Gold bullion (commodity, U.S.), Malaysia Airports Holdings Berhad (airport maintenance, Malaysia), Fanuc Limited (industrial automation, Japan), SMC Corporation (electrical machinery, Japan) and Thai Beverage, PCL (brewery, Thailand) collectively accounting for 2.24% of this period's performance.

The five largest detractors were Pargesa Holding SA (holding company, Switzerland), Jumbo SA (website operator, Greece), MS&AD Insurance Group Holdings (insurance, Japan), Sanofi-Aventis SA (pharmaceuticals, France), and Petroleo Brasileiro SA, ADR (energy, Brazil). Their combined negative performance over the six-month period subtracted 2.04% from the Fund's performance.

As of June 30, 2010, we were approximately 30% hedged versus the Japanese yen and the euro. We also aim to be 100% hedged on the Mexican peso on our non-mining holdings.

We continue to search the globe for what we feel are mispriced securities, while being mindful of our focus on preservation of capital. Encouragingly, we believe the discounts to intrinsic value have widened as a result of the decline in overseas markets.

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Management's Discussion of Fund Performance (continued)

As always, we appreciate your confidence and thank you for your support.

Matthew McLennan

Head of the Global Value Team
Portfolio Manager

Abhay Deshpande

Portfolio Manager

August 2010

Past performance is no guarantee of future results. The portfolio is actively managed. Current and future portfolio holdings are subject to risk.

There are risks associated with investing in funds that invest in securities of foreign countries, such as erratic market conditions, economic and political instability and fluctuations in currency exchange rates. Investment in gold and gold related investments present certain risks, and returns on gold related investments have traditionally been more volatile than investments in broader equity or debt markets.

The commentary represents the opinion of the Global Value Team Portfolio Managers as of August 2010 and is subject to change based on market and other conditions. These materials are provided for informational purposes only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. The views expressed herein may change at any time subsequent of the date of issue hereof. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security.

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Fund Overview | Data as of June 30, 2010 (unaudited)

INVESTMENT OBJECTIVE

First Eagle Overseas Variable Fund seeks long-term growth of capital by investing primarily in equities issued by non-U.S. corporations. Management's research-driven approach seeks to minimize risk by focusing on undervalued securities.

Average Annual Returns

Asset Allocation

Countries

The Fund's portfolio composition (represented as a percentage of net assets) is subject to change at any time.

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Overseas Variable

Growth of a $10,000 Initial Investment

Performance data quoted herein represents past performance and should not be considered indicative of future results. Performance data quoted herein does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares.

The average annual returns shown are historical and reflect changes in share price, reinvested dividends and are net of expenses.

The MSCI EAFE Index is a total return index, reported in U.S. Dollars, based on share price and reinvested net dividends of approximately 1,100 companies from 21 countries and is not available for purchase. The Consumer Price Index (CPI) represents the change in price of all goods and services purchased for consumption by urban households.

Top 10 Holdings

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First Eagle Overseas Variable Fund

See Notes to Financial Statements.
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Schedule of Investments | Six-Month Period Ended June 30, 2010 (unaudited)

See Notes to Financial Statements.
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Overseas Variable Fund

See Notes to Financial Statements.
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Schedule of Investments | Six-Month Period Ended June 30, 2010 (unaudited)

See Notes to Financial Statements.
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Overseas Variable Fund

See Notes to Financial Statements.
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Schedule of Investments | Six-Month Period Ended June 30, 2010 (unaudited)

See Notes to Financial Statements.
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Overseas Variable Fund

  (a)  Non-income producing security/commodity.

  (b)  Security is deemed illiquid. At June 30, 2010, the value of these securities amounted to $3,553,628 or 0.72% of net assets.

  (c)  All or a portion of the security is exempt from registration under the Securities Act of 1933. Rule 144A securities may only be sold to qualified institutional buyers, pursuant to Rule 144A under the Securities Act of 1933.

  (d)  Issuer is in default.

  (e)  Securities valued in accordance with fair value procedures under the supervision of the Board of Trustees, representing $0 or 0.00% of net assets.

  (f)  Represents a security registered under Regulation S. Bonds sold under Regulation S may not be offered, sold or delivered within the U.S., or for the account or benefit of, U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.

  (g)  Inflation protected security.

See Notes to Financial Statements.
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Schedule of Investments | Six-Month Period Ended June 30, 2010 (unaudited)

At June 30, 2010 cost is substantially identical for both book and federal income tax purposes; and net unrealized appreciation consisted of:

Abbreviations Used in this Schedule Include:

ADR  — American Depository Receipt

NVDR  — Non-Voting Depository Receipt

OAT  — French Treasury Obligation

PCL  — Public Company Limited

PLC  — Public Limited Company

RSP  — Represents Non-Voting Shares

UNIT  — More than one class of securities traded together.

Currencies

EUR  — Euro

MYR  — Malaysian Ringgit

TWD  — Taiwan Dollar

USD  — United States Dollar

See Notes to Financial Statements.
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Overseas Variable Fund

See Notes to Financial Statements.
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Statement of Assets and Liabilities

See Notes to Financial Statements.

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June 30, 2010 (unaudited)

See Notes to Financial Statements.

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Statement of Operations  Six-Months Ended June 30, 2010 (unaudited)

See Notes to Financial Statements.

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Statement of Changes in Net Assets

See Notes to Financial Statements.

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Financial Highlights

  ^(a)  Not Annualized

  ^(b)  Annualized

  ^(c)  Ratio of operating expenses to average net assets with and without earnings credits is substantially the same.

  ^(d)  Ratio of net investment income to average net assets with and without earnings credits is substantially the same.

  *  Per share amounts have been calculated using the average shares method.

See Notes to Financial Statements.

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Notes to Financial Statements (unaudited)

Note 1 — Significant Accounting Policies

First Eagle Variable Funds (the "Trust") is an open-end, diversified management investment company registered under the Investment Company Act of 1940, as amended. The Trust consists of one portfolio, First Eagle Overseas Variable Fund (the "Fund"). The Trust is a Delaware statutory trust and was until March 31, 2004 a Maryland Corporation operating under the name First Eagle Variable Funds, Inc. (First Eagle SoGen Variable Funds, Inc. prior to December 31, 2002). The First Eagle Overseas Variable Fund seeks long-term growth of capital by investing primarily in equities issued by non–U.S. corporations.

The following is a summary of significant accounting policies adhered to by the Fund and are in conformity with U.S. generally accepted accounting principles ("GAAP").

Effective December 7, 2009, Arnhold and S. Bleichroeder Advisers, LLC, has changed its corporate name to First Eagle Investment Management, LLC (the "Adviser").

a)  Investment valuation — The Fund computes its net asset value once daily as of the close of trading on each day the New York Stock Exchange ("NYSE") is open for trading. The net asset value per share is computed by dividing the total current value of the assets of the Fund, less its liabilities, by the total number of shares outstanding at the time of such computation.

A portfolio security, other than a bond, which is traded on a U.S. national securities exchange or a securities exchange abroad is normally valued at the price of the last sale on the exchange as of the close of business on the date on which assets are valued. If there are no sales on such date, such portfolio investment will be valued at the mean between the closing bid and asked prices (and if there is only a bid or only an asked price on such date, valuation will be at such bid or asked price for long or short positions, respectively). Securities, other than bonds, traded in the over-the-counter market are valued at the mean between the last bid and asked prices prior to the time of valuation (and if there is only a bid or only an asked price on such date, valuation will be at such bid or asked price for long or short positions, respectively), except if such unlisted security traded on the NASDAQ in which case it is valued at its last sale price (or, if available in the case of NASDAQ securities, the NASDAQ Official Closing Price ("NOCP")).

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(continued)

Commodities (such as physical metals) are valued at the spot price at the time trading on the New York Stock Exchange closes (normally 4:00 p.m. E.S.T.).

All bonds, whether listed on an exchange or traded in the over-the-counter market (and except for short-term investments as described in the next sentence), for which market quotations are readily available are valued at the mean between the last bid and asked prices received from dealers in the over-the-counter market in the United States or abroad, except that when no asked price is available, bonds are valued at the last bid price alone. Short-term investments maturing in sixty days or less are valued at cost plus interest earned (or discount amortized, as the case may be), which is deemed to approximate value.

The 2:00 p.m. E.S.T. exchange rates typically are used to convert foreign security prices into U.S. dollars. Any security that is listed or traded on more than one exchange (or traded in multiple markets) is valued at the relevant quotation on the exchange or market deemed to be the primary trading venue for that security. In the absence of such a quotation, a quotation from the exchange or market deemed by the Adviser to be the secondary trading venue for the particular security shall be used. The Fund uses pricing services to identify the market prices of publicly traded securities in their portfolios. When market prices are determined to be "stale" as a result of limited market activity for a particular holding, or in other circumstances when market prices are unavailable, such as for private placements, or determined to be unreliable for a particular holding, such holdings may be "fair valued" in accordance with procedures approved by the Board of Trustees ("Board"). Additionally, with respect to foreign holdings, specifically in circumstances leading the Adviser to believe that significant events occurring after the close of a foreign market have materially affected the value of the Fund's holdings in that market, such holdings may be fair valued to reflect the events in accordance with procedures approved by the Board. The determination of whether a particular foreign investment should be fair valued will be based on review of a number of factors, including developments in foreign markets, the performance of U.S. securities markets, and security-specific events. The values assigned to the Fund's holdings therefore may differ on occasion from reported market values.

The Fund has adopted procedures under which movements in the prices for U.S. securities (beyond specified thresholds) occurring after the close of a

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Notes to Financial Statements (unaudited)

foreign market may require fair valuation of securities traded on that foreign market. The values assigned to the Fund's holdings therefore may differ on occasion from reported market values. The Trust and the Adviser believe relying on the procedures described above will result in prices that are more reflective of the actual market value of portfolio securities held by the Fund as of 4:00 p.m. E.S.T.

The Fund adopted provisions surrounding fair value measurements and disclosures that define fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This applies to fair value measurements that are already required or permitted by other accounting standards and is intended to increase consistency of those measurements and applies broadly to securities and other types of assets and liabilities.

The Fund adopted updated provisions surrounding fair value measurements and disclosures effective March 31, 2010. This update applies to the Fund's disclosures about transfers in and out of Level 1 and Level 2 of the fair value hierarchy.

The Fund discloses the fair value of its investments in a hierarchy that prioritizes the inputs or assumption to valuation techniques used to measure fair value. These inputs are used in determining the value of the Fund's investments and are summarized in the following fair value hierarchy:

Level 1 — Quoted prices in active markets for identical securities.

Level 2 — Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3 — Other significant unobservable inputs (including fund's own assumption in determining the fair value of investments).

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(continued)

The following is a summary of the inputs used to value the Fund's investments as of June 30, 2010:

  ^(a)  Level 3 securities are identified in the Schedule of Investments with footnote (e).

  †  See Schedule of Investments for additional detailed categorizations.

  *  Represents gold bullion.

  **  Foreign currency contracts are valued at net unrealized appreciation (depreciation) on the investment.

    For the six-month period ended June 30, 2010, there was no security transfer activity from Level 1 to Level 2 and no security transfer activity from Level 2 to Level 1.

    The Fund did not have any Level 3 activity for the period ended June 30, 2010.

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Notes to Financial Statements (unaudited)

b)  Investment transactions and income — Investment transactions are accounted for on a trade date basis. The specific identification method is used in determining realized gains and losses from investment transactions. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. In computing investment income, the Fund accretes discounts and amortizes premiums on debt obligations using the interest method. Payments received from certain investments held by the Fund may be comprised of dividends, capital gains and return of capital. The Fund originally estimates the expected classification of such payments. The amounts may subsequently be reclassified upon receipt of information from the issuer.

c)  Expenses — Certain expenses are shared with the First Eagle Funds ("FEF"), an affiliated fund group. Such costs are generally allocated using the ratio of the Fund's average daily net assets relative to the total average daily net assets of FEF. Earnings credits may reduce custody fees, shareholder servicing agent fees and accounting fees by the amount of interest earned on balances with such service provider. The Fund did not have any earnings credits for the six-month period ended June 30, 2010.

d)  Foreign currency translation — The books and records of the Fund are maintained in U.S. dollars. The market values of securities which are not traded in U.S. currency are recorded in the financial statements after translation to U.S. dollars based on the applicable exchange rates at the end of the period. The costs of such securities are translated at exchange rates prevailing when acquired. Related dividends, interest and withholding taxes are accrued at the rates of exchange prevailing on the respective dates of such transactions.

The net assets of the Fund are presented at the foreign exchange rates and market values at the close of the period. The Fund does not isolate that portion of gains and losses on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the equity securities. However, for federal income tax purposes the Fund does isolate the effect of changes in foreign exchange rates from the changes in market prices for realized gains and losses on debt obligations.

e)  Forward currency contracts — In connection with portfolio purchases and sales of securities denominated in foreign currencies, the Fund may enter into forward currency contracts. The Fund's currency transactions include

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(continued)

portfolio hedging on portfolio positions. Portfolio hedging is the use of a forward contract (or other cash management position) with respect to one or more portfolio security positions denominated or quoted in a particular currency. Currency exchange transactions involve currencies of the different countries that the Fund invests in and serves as hedges against possible variations in the exchange rates between the currencies and U.S. dollar. The Fund may engage in portfolio hedging with respect to the currency of a particular country in amounts approximating actual or anticipated positions in securities denominated in that currency. These contracts are valued at the current cost of covering or offsetting such contracts, and the related realized and unrealized foreign exchange gains and losses are included in the Statement of Operations.

The Fund could be exposed to risk if the value of the currency changes unfavorably, if the counterparties to the contracts are unable to meet the terms of their contracts or if the Fund is unable to enter into a closing position. Forward currency contracts outstanding at period end, if any, are listed after the Fund's portfolio. Outstanding contracts at period-end are indicative of the volume of activity during the period.

The Fund adopted provisions surrounding disclosures and derivative instruments and hedging activities which require qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.

At June 30, 2010, the Fund had the following foreign forward currency contracts, grouped into appropriate risk categories illustrated below:

  ¹  Statement of Assets and Liabilities location: Receivable for forward currency contracts held, at value.

  ²  Statement of Assets and Liabilities location: Payable for forward currency contracts held, at value.

  ³  Statement of Operations location: Net realized gains (losses) from: foreign currency and forward contract related transactions.