Letter to shareholders

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Peter Kurer & Marcel Rohner

Dear shareholders,

UBS recorded a net loss attributable to shareholders of CHF 358 million in second quarter 2008. The result reflects realized and unrealized losses of USD 5.1 billion on risk positions, mainly on exposures related to US residential real estate and other credit positions. We also booked a provision of USD 900 million (CHF 919 million) related to auction rate securities. We recognized a net income tax benefit of CHF 3,829 million. Though clearly unsatisfactory, this outcome in the second quarter of 2008 was an improvement on the results of the prior two quarters.

During the second quarter, we further reduced our legacy risk positions. Details are given in this financial report. This predominantly resulted from asset disposals and, to some extent, further valuation adjustments. The largest transaction was the sale of US mortgage-backed securities to a fund managed by BlackRock for USD 15.0 billion in May 2008.

The balance sheet totaled CHF 2,078 billion at 30 June 2008, compared with CHF 2,231 billion at 31 March 2008, a decline of 7%. Risk-weighted assets fell by 3% to CHF 323 billion over second quarter 2008. We successfully completed our rights issue in June 2008. The expansion of our equity base and the lower level of risk-weighted assets resulting from our risk and balance sheet reduction have allowed us to rebuild our capital ratios to the very strong levels we enjoyed prior to the outbreak of the credit crisis. Our tier 1 ratio of 11.6% and our total capital adequacy ratio of 15.7% are among the highest in the global banking industry.

We also continued to adjust our costs downwards in line with the lower levels of activity we saw – and expect to continue to see in the immediate future – from all our clients, including private and institutional investors as well corporate and other issuers. Total operating expenses rose by 3% compared with first quarter 2008, affected by the provision related to auction rate securities, but decreased by 18% compared with second quarter 2007. We reduced the number of people employed at UBS by 3% over the quarter to 81,452. There will be further savings in future quarters, with a Group efficiency program now under way.

During the second quarter, the Board of Directors (BoD) issued new organizational regulations that clarify the separation of responsibilities between UBS’s BoD and its executive management. In the new corporate governance model: the BoD has clear responsibility for setting strategy and supervises and monitors the business; the Chief Executive Officer (CEO) is fully responsible for the executive management of the bank; and the duties of the former Chairman’s Office are now allocated to an increased number of BoD committees. Risk governance has been overhauled and clarified, with the BoD ultimately responsible, through its newly established Risk Committee, for the highest level portfolio as well as risk concentration measures and limits.

Today, along with the release of second quarter results, we propose four candidates for election to the BoD, as well as various other important changes. This follows the completion of a strategic review by the BoD in conjunction with the Group CEO. We also announce changes to the Group Executive Board (GEB).

The overall purpose of these changes is to increase our strategic flexibility, simplify the way UBS operates and improve transparency of the results of each part of the business and accountability at levels of management, all of which are essential steps on to a recovery in financial performance, reputation and shareholder value. The seven streams, in what is a major project to re-engineer UBS, are:

revised incentive systems to reward divisional management and staff for shareholder value creation in their own business divisions (during fourth quarter 2008);
further enhancements to the funding framework so that the costs and structure of the liabilities of each business division approximate those of stand-alone competitors (end 2009);
adjustments to the executive governance structure to reflect the above changes (by end third quarter 2008);
development of targets and performance indicators consistent with the repositioning of the business divisions;
reduction of the size and scope of the Corporate Center in line with the re-allocation of process ownership to the divisions;
review of inter-divisional servicing, revenue sharing and referral arrangements (mid 2009); and
continuation of the strategic cost reduction program targeted at increasing the efficiency of the Group.

UBS expects the change program to be complete by the end of 2009. At the end of this project, UBS will have greatly increased strategic flexibility and a set of businesses that, though they operate under one brand, are accountable for their own financial results and the risk and resources they deploy to achieve them.

These changes will build on a number of operational achievements during the quarter.

As mentioned above, you – our shareholders – subscribed for CHF 15.6 billion in new equity in the rights issue. This is a vote of confidence by you in the fundamental strengths of our businesses that we deeply appreciate.

We introduced a Group-wide efficiency project to systematically identify opportunities to reduce or eliminate unneeded or duplicative activities, processes and costs. The results of this project will allow us to, quickly and effectively, implement Corporate Center cost reductions and allocate certain Corporate Center tasks to the business groups.

We developed, subject to regulatory approval, a trust structure that will offer to purchase tax-exempt auction preferred stock (APS) at par, plus accrued and unpaid dividends, from clients who held these securities at UBS with a record date of 15 July 2008. We have subsequently announced a comprehensive settlement with the SEC and certain US state regulatory authorities, in principle, for all clients holding auction rate securities and booked a provision of USD 900 million (CHF 919 million).

We further expanded the footprint of our European wealth management business through the acquisition of VermogensGroep of the Netherlands.

UBS will set up operations in the Kingdom of Saudi Arabia and has selected a CEO for UBS Saudi Arabia. In addition, UBS has applied for a license to operate in Qatar and will expand Investment Banking Department and Equity research coverage in the region. This set of initiatives reflects UBS’s long-term commitment to the Middle East and will help achieve its goal of becoming one of the region’s leading financial services providers.

It is now quite clear that the world’s financial industry has experienced an event so extreme, and so rare, that we struggle to find historical parallels. There are very many lessons to learn from the fact that UBS was so badly affected. One thing that is clear is that regulatory scrutiny will continue to grow, and this might constrain UBS’s options in the future. We are fully committed to putting into place fundamental changes to the way UBS is run, both in the way it makes strategic decisions and in the way these are carried out. The effect of these changes will not be easily visible in the firm’s immediate financial results: instead, their success will be established only when UBS has recovered its financial standing and reputation, and when you – our shareholders – have begun to see a recovery in the value we create for you.

Outlook: In the second half of the year we do not expect any improvement in current adverse economic and financial market trends. We will continue our program to reduce personnel levels, costs and risk concentrations.

12 August 2008

UBS

Peter Kurer
Chairman

Marcel Rohner
Chief Executive Officer