Notes to the Financial Statements

UBS AG’s (“UBS”) consolidated financial statements (Financial Statements) are prepared in accordance with International Financial Reporting Standards (IFRS) and stated in Swiss francs (CHF). These Financial Statements are presented in accordance with IAS 34 Interim Financial Reporting. In preparing the interim Financial Statements, the same accounting principles and methods of computation are applied as in the Financial Statements on 31 December 2006 and for the year then ended except for the changes set out below.

The interim Financial Statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made.

These interim Financial Statements should be read in conjunction with the audited Financial Statements included in the UBS Financial Report 2006.

Changes in accounting policies and presentation

IFRS 7 Financial Instruments: Disclosures

On 1 January 2007, UBS adopted the disclosure requirements for financial instruments under IFRS 7. The new standard has no impact on recognition, measurement and presentation of financial instruments. Accordingly, the first-time adoption of IFRS 7 had no effect on Net profit and Equity. Rather, it requires UBS to provide disclosures in its financial statements that enable users to evaluate: a) the significance of financial instruments for the entity’s financial position and performance, and b) the nature and extent of the credit, market and liquidity risks arising from financial instruments during the period and at the reporting date, and how the entity manages those risks. The disclosure principles of IFRS 7 complement the principles for recognizing, measuring and presenting financial assets and financial liabilities in IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement. The new disclosure requirements will mainly impact UBS’s annual 2007 Financial Statements rather than the quarterly Financial Statements.

UBS has entered into transactions for which fair value is determined using valuation models for which not all inputs are market-observable prices or rates. Such financial instruments are initially recognized in UBS’s Financial Statements at the transaction price, which is generally the best indicator of fair value, although the value obtained from the relevant valuation model may differ. Where such differences arise, UBS is required by IFRS 7 to disclose: a) its accounting policy for recognizing that difference in profit or loss to reflect a change in factors (including time) that market participants would consider in setting a price, and b) the aggregate difference yet to be recognized in profit or loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference (movement of deferred day 1 profit or loss). The respective accounting policy is reflected in Note 1 to the Financial Statements 2006. For the movement of the deferred day 1 profit or loss, refer to Note 9 of this report.

Positions related to the US sub-prime residential mortgage market

The valuations applied by UBS in its balance sheet on 30 September 2007 reflect the weakness in the US housing market during the quarter.

Where possible, holdings are marked at the quoted market price (also known as “level 1” inputs in accounting terminology). For the positions related to the US sub-prime market, this was and is still not possible in present market conditions. UBS therefore mostly uses valuation techniques based on “observable inputs” derived from similar assets in similar and active markets, from recent transaction prices for comparable items or from other observable market data (“level 2” inputs). For positions where observable reference data is not available UBS uses econometric models with non market observable (“level 3”) inputs.

The inputs to these econometric models principally comprise remittance data from mortgage service companies. These are received towards the end of each month and relate to the preceding month’s cash flows on the mortgages underlying the relevant mortgage-backed securities. Our models assess the level of risk in the underlying mortgage portfolio and estimate the fair value of the positions we hold. Although our models are proprietary and there is no single market standard model, our approach is similar to that used by other market participants. Our models are calibrated to transactions in similar instruments and are reviewed and updated from time to time. They do not necessarily contain sentiment or predictions that are implicit in active, liquid, level 1 transactions. Such models have inherent limitations, and different assumptions and inputs would generate different views.

Adverse fair value changes of instruments related to the US sub-prime residential mortgage market are reflected in Net trading income. The related trading positions are recognized on UBS’s balance sheet as Trading portfolio instruments as well as Positive and Negative replacement values.

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