Commentary

Quarter Ending June 30, 2008

For the six months ending June 30, 2008, the Matthews Asian Technology Fund lost -22.04%, underperforming its benchmark, the MSCI/Matthews Asian Technology Index, which declined -11.27%.

The Fund continued to look for long-term opportunities in a broad range of technology industries that we believe are poised to benefit from increasing demand from Asian consumers and overall growth in the Asia Pacific region. During the first half of 2008, the Asian technology sector corrected due to a worsening macroeconomic environment that stemmed from worries over the U.S. credit crisis, high oil prices and increasing fears of a recession in the U.S. market. This period was, likewise, a challenging one for the Fund.

On a sector basis, the software and services segment experienced the most significant decline, making it the worst performer for the Fund. Over the years, the Fund has benefited from its software and services holdings, and the segment’s growth outlook in the region still remains solid. Demand for various Internet services such as keyword search, casual and massively multiplayer online role-playing games (MMORPG), multimedia content and social networking sites also remains strong. Despite short-term volatility in share prices, we believe that the long-term growth potential of the Asian Internet sector remains attractive. The Fund added to core holdings in the sector where we saw good long-term investment opportunities. In this same period, the Fund also benefited from some exposure to pharmaceutical companies in India, which can be defensive and outperform during volatile market environments.

The technology hardware and equipment sector was also hit by the difficult global macro environment during the period. The U.S. market remains one of the most important markets for Asian technology equipment, and a slowdown in consumer demand in the U.S. remains a key concern for the sector. In response, we have increased our focus on specialized components and manufacturers of specialty materials that may have less cyclical margin structures than other technology hardware manufacturers.

During the first half of 2008, the Fund’s Chinese and Indian technology holdings saw the biggest corrections. After strongly outperforming last year, these stocks had high valuations relative to other technology stocks in the region. Small-cap holdings in South Korea also underperformed the broader technology universe, hurt by a weak macro environment. These Korean small-cap firms were also impacted by the rapid depreciation of the Korean currency, the won. The Fund’s overweight exposure to China, India and South Korea as well as its underweight in Japan and Taiwan hurt its performance relative to its benchmark during the period.

On a company basis, the Fund’s performance was helped most by China’s Tencent Holdings, which provides value-added services for the Internet as well as online advertising. Despite the overall weakness of the Internet sector, Shenzhen-based Tencent held up relatively better than specialized service providers due to its diverse exposure to various Internet services such as casual games, community-based portals, instant messenger services and other value-added Internet services. Kingdee International Software was the second-largest contributor to the Fund. Kingdee provides enterprise management and accounting solutions to small- to medium-sized companies in China.

The Fund’s worst performers were Mixi.com in Japan and NHN in Korea. Mixi.com is a social networking site in Japan that was hurt by slower-than-expected profit growth. Mixi.com operates one of the largest social networking sites in Japan and is popular among Japanese youth. The company continues to see its core asset—membership—grow, and we believe that its management should be able to find more ways to monetize its user base in the future. NHN, Korea’s largest Internet company providing search, casual games, e-commerce and news, was hurt by increasing regulatory risks involving its media business and slower-than-expected growth in the search business. We view these issues as short-term in nature and expect NHN to continue its growth in various Internet services. We also believe it should maintain its dominant position in Korea.

By country, overall returns were strongest in Hong Kong and Thailand while China was the Fund’s worst-performing country. We took advantage of the short-term volatility in Chinese and Indian technology companies, to increase the portfolio’s weightings in some key holdings in China and India where we have seen good, long-term investment opportunities. We also have added to leading consumer services companies in Korea and China. The Fund has continued to maintain its overweight positions in China, India and Korea as well as its underweight positions in Japan and Taiwan.

Over the next six-months, high energy prices, high inflation and a dampened U.S. consumer spending trend will remain key concerns for Asian technology industries. Despite short-term volatility in the technology sector and the overall equity market, we continue to look for long-term opportunities, and we believe the Fund is well positioned to capture growth from the increasing wealth of Asian consumers, and the rise of Asia’s leading global technology companies.

The views and opinions in this commentary were current as of June 30, 2008. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Funds' future investment intent.

Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy.

As of 6/30/08, Tencent Holdings, Ltd. accounted for 4.2% of the Matthews Asian Technology Fund, Kingdee International Software Group Co., Ltd. accounted for 1.5%, Mixi, Inc. accounted for 1.3%, and NHN Corp. accounted for 4.2% of the Fund.