Notes (unaudited)

a) Fair Value Hierarchy

Material changes in level 3 instruments resulting from transfers from, or into, Levels 1 and 2

The financial assets measured with valuation techniques reflecting significant non-market observable inputs (level 3) mainly include instruments linked to the US residential sub-prime, Alt-A and prime real estate markets, instruments linked to the US commercial real estate market, US reference linked notes, student loan auction rate certificates (ARCs), variable rate demand obligations (VRDOs) and other student loan ABS, other non-real estate ABS, leveraged finance deals, and structured rates and credit trades. Level 3 financial liabilities mainly include instruments linked to the US residential sub-prime market, structured rates and credit trades and hybrid financial liabilities.

The following paragraph sets out details about reclassifications of the most significant items contributing to the changes in level 3 assets and liabilities during the first quarter 2008.

Previously available quoted market prices or observable input parameters became unobservable during first quarter 2008 for the following types of positions. Fair values of these positions have therefore been determined using valuation models which include significant non-market observable input parameters - level 3 valuations:

- Student loan ARCs, VRDOs and other student loan ABSs, recognized as trading portfolio assets, with a fair value of approximately CHF 10 billion for which the normal regular auctions have failed due to lack of investor demand.

- Positive and negative replacement values of approximately CHF 10 billion and CHF 12 billion respectively in respect of synthetic bespoke CDOs and certain credit default swaps, where prices of the underlying portfolios and correlation of reference credits are unobservable.

- US residential prime mortgage securities and CDOs, recognized as trading portfolio assets, with a fair value of approximately CHF 3 billion where with liquidity for certain issuances has reduced compared fourth quarter 2007.

- Certain non-real estate ABS, e.g. securities backed by credit card loans, other consumer loans, aviation loans, and structured collateralized corporate loan obligations, recognized as trading portfolio assets, have been valued with significant unobservable inputs, where liquidity for certain issuances has reduced compared with fourth quarter 2007.

- Leveraged finance loans and commitments recognized as trading portfolio assets with a fair value of approximately CHF 1 billion where there is no liquid loan trading market and no observable credit spread in the credit default swap (CDS) market for the specific name.

- Hybrid financial liabilities and other financial liabilities designated at fair value with an amount of approximately CHF 15 billion have been included into level 3 at 31 December 2007 although they relate to level 1 and level 2 valuations. In addition, expiries of trades, fair value reductions of liabilities linked to the US residential real estate market and other factors contributed to the decrease of level 3 financial liabilities designated at fair value.

Refer to Note 3 for profit and loss information on positions which significantly impacted the income statement in first quarter 2008.

Nature and type of assets underlying asset-backed securities

Information about US residential mortgage-backed securities and certain other asset-backed securities is provided in Note 3 and in the MD&A to the financial statements, section Risk concentrations. This includes certain details about categories, vintages and credit ratings of such instruments, where applicable.

b) Valuation Techniques and Inputs

Positions related to the US residential mortgage market

Where possible, financial instruments are marked at prices quoted in active markets. In the current market environment, such price information is typically not available for instruments linked to the US residential mortgage market, and UBS applies valuation techniques to measure such instruments. Valuation techniques use "market observable inputs", where available, derived from similar assets in similar and active markets, from recent transaction prices for comparable items or from other observable market data. For positions where observable reference data is not available for some or all parameters, UBS estimates the non-market observable inputs used in its valuation models.

For the period ended 31 March 2008, UBS used valuation models primarily for super senior RMBS CDO tranches referenced to sub-prime RMBSs. The model used to value these positions projects losses on the underlying mortgage pools and applies the implications of these projected lifetime losses through to the RMBS securities and then to the CDO structure. The primary inputs to the model are monthly remittance data that describe the current performance of the underlying mortgage pools. These are received near the end of each month and relate to the preceding month's cash flows on the mortgages underlying each RMBS.

In fourth quarter 2007 and first quarter 2008, UBS calibrated its loss projections to ensure that the value of relevant market indices (for example, ABX indices) implied by the super senior RMBS CDO model would be consistent with the observed levels of the indices in the market. Despite the various limitations in the comparability of these indices to UBS's own positions, it was felt that this was the best approach in view of the further deterioration in liquidity and resultant lack of observed transactions to which the model could be calibrated. The valuation model also considers the impact of variability in projected lifetime loss levels and applies a discount rate for expected cash flows derived from relevant market index prices (for example, ABX indices) to value expected cash flows. The external ratings of the RMBSs underlying the CDO tranches or the CDO tranches themselves are inputs to the valuation model only to the extent that they indicate the likely timing of potential "events of default". The valuation model incorporates the potential timing and impact of such default events based on an analysis of the contractual rights of various parties to the transaction and the estimated performance of the underlying collateral. There is no single market standard for valuation models in this area, such models have inherent limitations, and different assumptions and inputs would generate different results.

The super senior RMBS CDO valuation model is used to value UBS's net long exposures to super senior RMBS CDOs. It is also used where UBS holds a gross long position hedged one-to-one with an offsetting short position in the form of credit protection purchased from a monoline insurer, to provide an estimate of the current credit exposure to the monoline insurer. The fair values of the combined positions also take account of the counterparty credit risk of the monoline insurers. Where valuation techniques based on observable inputs are used to value RMBS positions, a consistent approach is used to value related hedge positions with monoline insurers.

Information about the risks and exposures of such items is included in the "Risk concentrations" section in the MD&A.

Sensitivity information on level 3 financial instruments

US super senior RMBS CDO

Write-downs on super senior US RMBS CDO positions (sub-prime, Alt-A and prime) during first quarter 2008 reflected continued declines in the ABX indices to which the valuation model is calibrated. These declines accounted for approximately two-thirds of the total write-down on these positions. In addition, the following factors contributed to the write-downs: a) adoption of more severe model assumptions in relation to loss severity, and in relation to loss projections on collateral originally rated A and higher, and b) an increase in the risk premium that is applied to projected cash flows within the valuation model, based on an assessment of market conditions prevailing at the end of the quarter.

The two primary unobservable factors in the valuation model are the loss projections on the underlying mortgage pools and the risk premium component of the discount rate. To assess the sensitivity of the valuation to the loss projections, a 10% adverse change in all mortgage pool loss projections (that is, from 15% loss to 16.5% loss) across all relevant RMBS collateral is considered. Holding all other elements of the model constant, this adverse change in loss projections would result in an additional write-down of approximately USD 1.1 billion (CHF 1.1 billion). The current risk premium assumption in the valuation model is 11.1% (implying a discount rate of Libor plus 11.1%). An increase in the risk premium of 100 bp, holding other aspects of the model constant, is estimated to result in an additional write-down of approximately USD 175 million (CHF 173 million). These estimates are intended to convey information on the sensitivity of the model-based valuation to unobservable inputs; they are not intended as risk assessments. A sensitivity to unobservable inputs of approximately USD 1 billion (CHF 1 billion) for these positions was included in the aggregate sensitivity calculations presented at year-end 2007.

Credit valuation adjustments on monoline credit protection

Credit valuation adjustments for monoline credit protection are based on a model that utilizes five year credit default swap spreads on the monolines as a key input in determining an implied level of expected loss.1 To assess the sensitivity of this calculation to alternative assumptions, the impact of a 10% increase in these credit default swap spreads is considered. At 31 March 2008, such an increase would have resulted in an increase in the monoline credit valuation adjustment of approximately USD 161 million (CHF 159 million).

In addition, the credit valuation adjustments related to transactions referencing RMBS CDOs are sensitive to the same unobservable inputs highlighted in the preceding discussion of US super senior RMBS CDOs. The sensitivity of the monoline credit valuation adjustment to a 10% adverse change in loss projections related to the collateral underlying referenced RMBS CDOs is estimated at USD 30 million (CHF 30 million). The sensitivity of the monoline credit valuation adjustment to an increase of 100 bp in the discount margin used in valuing RMBS CDOs is estimated at USD 21 million (CHF 21 million).

Student loan auction rate certificates (ARCs)

Where student loan ARCs have been classified as level 3 due to impaired market liquidity, they have been valued as floating rate notes with three pricing inputs - the coupon, the current discount margin or spread, and the maturity. The coupon is generally assumed to equal the maximum rate allowed under the terms of the instrument, the current discount margin is based on an assessment of observable yields on instruments bearing comparable risks, and the maturity is based on an assessment of the term of the underlying instrument and the potential for restructuring the ARC. Model assumptions differ according to the characteristics of the underlying ARC (i.e taxable versus tax-exempt instruments, government insured versus privately insured). The primary unobservable input to the valuation is the maturity assumption, currently set at five years for the majority of the ARC instruments. If this assumption is increased by one year (that is, to six years), the impact would be an additional write-down of approximately USD 180 million (CHF 178 million).

¹ In one case, UBS has assessed a credit valuation adjustment of 100% and declared the hedge completely ineffective. This credit valuation adjustment level is not derived from a model-based calculation. The sensitivity of the now unhedged CDO valuations to unobserved inputs is included in the preceding discussion of US super senior RMBS CDOs.

c) Deferred Day-1 Profit or Loss

The table reflects financial instruments for which fair value is determined using valuation models where not all inputs are market-observable. Such financial instruments are initially recognized in UBS's Financial Information at their transaction price although the values obtained from the relevant valuation model on day-1 may differ. The table shows 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).