FROM THE INVESTMENT ADVISOR

Dear Shareholder,

We are pleased to present the third quarter 2006 report for the Matthews Asian Funds. Generally speaking, the third quarter saw most Asian markets outside of Japan rally strongly following a sharp correction in the second quarter. The recent pause in the U.S. Federal Reserve’s interest rate increases combined with falling oil prices restored confidence among investors in the region, and markets recovered much of the ground they had lost in the early summer. The second-best-performing country in Asia during the quarter was India (behind Bangladesh), and the Matthews India Fund ended the quarter up 17.88%. At the other end of the spectrum, the Japanese market remained weak for the quarter, and the Matthews Japan Fund declined 3.66%.

For the year through September 30, the markets of China and India, which represent the least-developed of Asia’s major economies, showed strong returns, while the markets that represent the more-developed economies in the region performed less well. The recent relative performance of the Indian and Chinese markets reflects a growing recognition of their increased importance as the major drivers of the region’s economic evolution. While both countries have achieved above-average economic growth for a sustained period, their per

capita incomes and output remain at a fraction of the level of their more-developed neighbors in Japan, Singapore, Taiwan or South Korea. The economic reforms that have driven the recent growth of these two very large countries remain at the forefront of the region’s evolution, and their continued integration into the global economy is having an obvious impact on many global industries.

Within the Matthews Asian Funds, seven of the eight funds that comprise the series showed gains for the quarter. The performance of the Matthews Asian Growth and Income Fund lagged its benchmark for the quarter, while the Matthews India Fund was the best performer among the Matthews Asian Funds for the quarter, but was nevertheless still bested by its benchmark, the BSE 100 Index. The Matthews Pacific Tiger and Matthews Asian Technology Funds outperformed their benchmarks for the quarter. Commentaries on each Fund’s absolute and relative performance are included in their dedicated fund sections.

The performance of the Matthews Japan Fund deserves special mention, mainly because it remained the one fund in the family that had a negative return year to date through September 30. While Japan’s

relative performance has been disappointing of late, we continue to believe that the Japanese economy remains of great importance to the region and its stock market one of the most developed in Asia. Its economy is still emerging from a prolonged period of slower growth, and initiating an aggressive economic reform program has proved challenging for Japan’s relatively developed democracy and maturing population. Nevertheless, reforms are underway that are bringing about significant change in the financial markets, and we believe that these reforms will prove positive for the Japanese economy and stock market in the long term. With this in mind, we announced the addition of two seasoned managers as co-portfolio managers of the Matthews Japan Fund: David Ishibashi and Taizo Ishida. (Please see pages 46–47 for more details on their appointments.) We believe that the expansion of the investment team is a major step and one that will benefit the entire team’s understanding of the dynamics that are impacting Asia’s rapidly changing corporate landscape and enhance our ability to analyze the over 2,000 investable companies in Japan.

The performance of most Asian markets since the depths of the Asian financial crisis eight years ago has been most encouraging. Generally speaking, the region has gained

share relative to the rest of the world in total stock market capitalization terms while attracting the major share of global direct investment flows over the period. The equity markets around the region have attracted a large

number of new listings and privatizations, and absolute performance has been among the world’s best for several years. Governance and transparency have been much improved in almost all markets over that same period.

One area in which the region continues to lag Europe and the Americas is in the development of broad and deep regional bond markets that can offset the continued heavy dependence on bank financing. Such markets are unlikely to develop fully until

a clear contender emerges as a regional currency benchmark, and the lack of freely floating currencies remains a potential source of future instability.

Political development in the region remains uneven, with the success of democratic regimes in countries such as South Korea offset by the recent coup in Thailand and the continued suppression of information flows in many Asian countries. Geo-political issues remain challenging in North Korea as well as between Taiwan and China. For these and other reasons, it is likely that Asia’s financial landscape will remain volatile but exciting for the foreseeable future.

We thank you for your continued support of the Matthews Asian Funds.

G. Paul Matthews

Chairman and Chief Investment Officer

Matthews International Capital Management, LLC

Mark W. Headley

Chief Executive Officer and Portfolio Manager

Matthews International Capital Management, LLC

PORTFOLIO MANAGER COMMENTARY

The Matthews Asia Pacific Fund saw positive returns in the third quarter, gaining 2.42%. Over the same period, the MSCI All Country Asia Pacific Index gained 2.03% and the Lipper Pacific Region Funds Category Average gained 1.61%. Japan was the notably weak market during the period, with the rest of the region generally recovering from the turmoil of the second quarter. Overall, markets continued to look for signals from the U.S. economy and global energy prices.

The portfolio saw solid returns from a wide range of financial holdings. Hong Kong-based Dah Sing Financial was one of the best performers for the quarter. A mid-sized banking, consumer lending and insurance business, Dah Sing is one of the largest holdings in the portfolio and provides targeted exposure to Hong Kong’s domestic activity, with long-term potential to

holding. Such positions very much defy the “closet benchmark” positioning of which active funds are often accused. Hong Kong and China provided the best geographical returns for the period as well as for the year-to-date. India and Indonesia also saw solid positive returns for the quarter.

Japan continued to be the major source of weakness within the portfolio both during the quarter and year-to-date. The sharp sell-off of small and medium-sized companies has continued

since the debacles at the beginning of the year. We are increasing our exposure to Japan’s smaller companies with the input of our expanded Japan team. (For more information, please see the Matthews Japan Fund commentary on pages 46–47.) While many small-cap companies may have been overvalued at the beginning of the year, the severity of the decline appears to be inordinate, and many of Japan’s best long-term growth opportunities can be found in this sector.

A Japanese mid-sized company that was added earlier during the year, Sysmex, represents much of what we believe is exciting about Japan’s smaller companies. With a market capitalization of approximately US$1.9 billion, the company has a powerful global niche in hematology—the study of human blood. With a wide range of sophisticated diagnostic equipment, the company has significant market share in this growing field in both Japan and Europe. A major effort to penetrate the U.S. market is now underway. Sysmex is representative of a class of Japanese companies that have strong global niches in industries that demand high-level technology and manufacturing excellence.

For the first time in a number of quarters, the Fund’s lack of exposure to energy and commodities was a positive for performance, and we continue to place our emphasis on companies that grow organically rather than rely on commodity pricing for appreciation. The overall exposure to domestically related industries has also continued to be a defining element in the Fund’s positioning. We continue to believe that exposure to domestic

earnings streams is the best long-term means of achieving diversification for U.S. investors and rivals any opportunity for growth in the global market.

One interesting factor is the extent to which China and India have captured global market interest this year to a level rarely rivaled in the past. While we have the highest regard for both of these emerging giants, we are careful to keep an eye on areas of Asia that are enjoying the spotlight. Along with Japan’s battered smaller companies, we are looking closely at some of Asia’s smaller markets for opportunities. Markets such as Malaysia have seen valuations fall significantly in recent years and may be worth consideration during a period of exuberance elsewhere.

General conditions in Asia continue to impress us with a steadiness that was rare in earlier periods, but events such as Thailand’s coup and North Korea’s nuclear test are important reminders that negative events can occur out of the blue. Our bottom-up approach does not ignore the factors that inevitably impact companies, such as regulatory and political events, and we are proud of our long knowledge of Asia’s social, economic and political history. Still, we believe that at the end of the day, it is the company that most frequently defines its own history, and we are constantly searching for those companies that we believe will thrive in Asia’s increasingly integrated and highly competitive environment.

See accompanying notes to schedules of investments.

Note: This fund is closed to most new investors.

PORTFOLIO MANAGER COMMENTARY

For the third quarter of 2006, the Matthews Pacific Tiger Fund gained 7.93%, outperforming both its benchmarks and peer group. The MSCI All Country Far East ex-Japan Index, the Fund’s benchmark since inception, gained 6.29%, while the MSCI All Country Asia ex-Japan Index, which includes India, gained 7.35%. The Lipper Pacific ex-Japan Funds Category Average gained 5.99% for the period.

Overall, the markets enjoyed a positive period, with falling oil prices and the U.S. Federal Reserve ending a prolonged series of interest rate hikes. A pullback in many key commodity prices is positive for most Asian economies, unlike commodity-driven economies often associated with the “emerging markets” asset class. The markets continue to be concerned about the potential impact of a slowing U.S. economy on Asian exports. Some

economic pain, benefiting Asia’s highly efficient manufacturing outsourcing platform. Still, we do believe that a major slowdown in the U.S. would have a significant effect on Asian markets, especially if such a slowdown were driven by the retrenchment of the U.S. consumer.

The portfolio has extended its exposure to domestic economic activity in recent months and modestly reduced its already limited exposure to export-focused companies. We make no pretense that this strategy fully

mitigates the risk of an impact from abroad, but we continue to find the most compelling long-term growth opportunities within domestic and regional economic activity, and such positioning provides an enhanced level of diversification for U.S. investors.

During the third quarter, the Fund saw strong returns from a wide range of financial holdings including banking, insurance, brokerage and property. China’s newly listed financial institutions have been a particularly ebullient sector, with strong demand from both global and local investors for these large entities. While the Fund has participated in Chinese companies, its largest holdings in the sector continue to be long-term positions in Hong Kong, Korea and Singapore. Dah Sing Financial is a medium-sized Hong Kong institution with an attractive balance of banking, consumer lending and insurance businesses. Hana Bank in Korea is another long-term holding that has provided excellent exposure to Korea’s restructured banking sector and is now branching out into the regional asset management industry. Finally, in Singapore we hold DBS Group, one of southeast Asia’s largest financial institutions, with a growing regional footprint. We believe that each of these holdings provides strong domestic exposure to both basic banking as well as rapidly growing areas of fee income.

The portfolio saw its returns dominated geographically by returns from India and China/Hong Kong. All regional markets managed positive returns, and the only sector to post a negative return was industrials. This was a quarter in which the portfolio’s lack of exposure to commodities and energy worked

in its favor, a rare event in the past two years. The notably weak 12-month performance can likely be explained to some degree by this lack of exposure to these sectors. We continue to focus on companies that can grow their earnings organically rather than rely on unpredictable commodity prices to determine profitability.

Another notable characteristic of the third quarter was the continued dominance of China and India in terms of performance. These two large economies have dramatically captured the imagination of global investors, and market performance has been very strong. While we remain very enthusiastic about the long-term trajectory of both China and India, we are mindful not to forget the many other fine growth opportunities around the region, many of which offer very significant exposure to these two growing giants. A recent visit to Thailand, Malaysia and Singapore reinforced our commitment to the smaller economies in Asia.

Malaysia is a particularly interesting case given the Fund’s history there. The Fund had significant exposure to the Malaysian market in the mid-1990s. Suddenly, at the very end of the Asian financial crisis, the government of Malaysia panicked over its weakening currency and placed capital controls on all foreign investment in the markets. As a result, the Fund’s capital was locked up in Malaysia, although not threatened with expropriation. We exited the market when the controls were lifted a year later in 1999 and had not returned since. This decision represented a very rare top-down decision driven by

extraordinary circumstances. We are reasonably convinced that the new government, while not formally renouncing capital controls, is very unlikely to reintroduce them even during a time of turmoil. The portfolio is building very modest exposure to the market based on the growth and value available. The portfolio is also likely to modestly increase its exposure to companies in other southeast Asian nations, maintaining a high level of diversification across Asia’s local economies.

The portfolio has remained fully invested with holdings ranging from very small companies to some of Asia’s largest. We continue to find medium-sized companies as the ideal target area for core positions, with their combination of higher growth potential than very large companies and yet with the history and market liquidity that smaller companies often lack. It is also notable that medium-sized companies may be less impacted by the massive flows of both passive and top-down assets that tend to push primary index constituents up and down in a manner that is often detached from underlying fundamental conditions.

SCHEDULE OF INVESTMENTS* (UNAUDITED)

EQUITIES: 99.4%**

See accompanying notes to schedules of investments.

Note: This fund is closed to most new investors.

PORTFOLIO MANAGER COMMENTARY

The Matthews Asian Growth and Income Fund returned 3.42% in the third quarter of 2006, underperforming its benchmark MSCI. All Country Far East ex-Japan Index, which rose 6.29% over the same period. The Lipper Pacific ex-Japan Funds Category Average gained 5.99% for the quarter.

Volatility continued to dominate Asian markets during the third quarter, though most of the markets’ movement was positive during the period. After falling sharply in the second quarter, Asian equities recovered a good deal of lost ground as quarterly earnings results generally proved favorable. The resurgence of stocks accelerated in September as global interest-rate conditions proved more benign, particularly as the U.S. Federal Reserve indicated its willingness to pause its

achieve the Fund’s objective of long-term capital gains, the Advisor has adopted a strategy which utilizes convertible bonds and dividend-paying equities as a means to participate in a portion of Asia’s growth potential, meanwhile offering some downside protection during market corrections.

In this fashion, the Fund has avoided some of the sharp volatility that has characterized Asian markets throughout

the year: through the end of the third quarter, the volatility of the Fund has been approximately 60% that of the overall market (as represented by the Fund’s MSCI benchmark). Nevertheless, this strategy has at times resulted in the Fund underperforming in sharp market rallies, and the third quarter proved no exception. We continue to look for opportunities for shareholders to invest in Asia’s best growth companies while simultaneously aiming to mitigate a portion of the risk in the region’s markets.

Financial sector stocks, which often are sensitive to changes in interest-rate conditions, performed particularly well for the Fund during the third quarter. Bank and property-related securities rallied, particularly as markets saw that rates had not yet climbed to such a degree as to dampen demand for either bank credit or mortgages.

Service-oriented companies also performed well, particularly those buoyed by growing intra-regional trade and commerce. One place this is particularly evident is in Hong Kong’s hotel industry, which saw its fundamentals recover sharply after the downturn associated with the SARS virus scare in early 2003. One of the Fund’s top-performing holdings during the quarter was a long-held position in a convertible bond issued by a leading Hong Kong/China hotelier, Shangri-La Asia.

Hong Kong hotels have seen tourists and business travelers flood into the city, boosting occupancy rates and room tariffs to near peak levels. Asia’s hospitality industry has

seen its fortunes vary much in recent years, particularly as capacity additions have in times past undermined hoteliers’ pricing power. However, commercial and tourist travel has currently risen to such an extent in key Asian cities as to even become a bottleneck to continued economic expansion. For example, in peak season, hotel rooms in Bangalore, India’s software hub, may not be available at virtually any price.

Media companies continued to place a drag on the Fund’s performance during the quarter. Nevertheless, we continue to believe strongly in the growth prospects for this industry in Asia: Advertising expenditures, as measured relative to economic output, are quite low in most of the region’s economies, and in recent years, there is some evidence that ad spending has begun to outpace economic growth. Yet in recent quarters, media companies have been beleaguered by stiff competition within their respective industries, particularly as they wrestle with the adoption of new technologies advanced by wireless networks and the Internet. Political forces have also proven to be a headwind at times, as media companies have struggled to operate free of political influence and excessive regulatory constraints.

Corporate earnings growth has thus far held steady amidst continued economic expansion across the region, including Japan. The outlook for the future path of interest rates continues to be one of the most substantial sources of uncertainty for Asia ex-Japan: Inflationary pressures, which have been

generally quiescent to date, may have less slack in coming quarters. Meanwhile, Japan’s conditions are quite different, as inflation remains muted, rates are low, and concerns regarding deflation still hang over the market. Yet even as Japan’s economic momentum lags that of the rest of Asia, we remain confident that market reforms undertaken there will pave the way for renewed growth, and thus we continue to look for means to participate in the recovering domestic economy.

SCHEDULE OF INVESTMENTS* (UNAUDITED)

COMMON EQUITIES: 73.1%**