Treasury shares

Under IFRS accounting rules, UBS shares held for trading or non-trading purposes are recorded as treasury shares and deducted from shareholders’ equity. Our holding of treasury shares decreased to 104,259,874 or 9.6% of shares issued on 31 December 2005, from 124,663,310 or 11.1% on the same date a year ago. Of the treasury shares held, 33,885,000 are earmarked for cancellation whereas the other 70,374,874 cover employee share and option programs and, to a limited extent, market-making activities at the Investment Bank.

Treasury shares earmarked for cancellation (share buyback program 2005/2006)

Strong earnings and careful management of our balance sheet allowed us to conduct a share buyback program for the sixth consecutive year in 2005 – giving us the opportunity to reduce the number of issued UBS shares, enhancing earnings per share. Under Swiss regulations, a company wishing to cancel shares must purchase them on the stock exchange under a special security code that clearly identifies to the market the time and quantity of shares repurchased for that specific purpose. As in previous years, we announced a maximum Swiss franc amount to be used for share purchases under the buyback program. The level of repurchases is determined by our capital management plan, which is adjusted throughout the year to reflect changes in business plans or acquisition opportunities. Our strong cash flow generation combined with our sound capitalization allows us to invest in the growth of our businesses by growing organically or making acquisitions. In the absence of such opportunities, we would return any excess capital to shareholders through share buybacks or dividends. UBS publishes the number of shares repurchased and the average price paid on a weekly basis on the internet at www.ubs.com/investors.

At the Annual General Meeting on 21 April 2005, shareholders gave the Board of Directors a mandate to set up a repurchase program in 2005 / 2006 for a maximum amount of CHF 5 billion. At the AGM on 19 April 2006, shareholders will be asked to approve the cancellation of 37,100,000 shares representing a total value of CHF 4.0 billion under the program that ended on 7 March 2006. The shares will be cancelled in summer 2006.

The table below shows the impact on basic earnings per share of the purchase of treasury shares through the second line buyback program.

Treasury share holdings for employee participation plans

UBS shares are also purchased and held to satisfy share delivery obligations under UBS’s share and option-based participation plans that align the long-term interests of executives, managers, staff and shareholders. For share-based participation plans, UBS shares are purchased in the market and set aside for future distribution to employees once the holding period criteria have been met. For satisfying future share delivery obligations out of employee option plans, UBS shares are also purchased in the market and held to partially hedge the future obligations.

At year-end, a total of 90.9 million outstanding employee options at an average exercise price of CHF 84 represented potential future share delivery obligations to employees, which UBS currently mainly satisfies through the delivery of treasury shares purchased in the market. In 2005, a total of 30.7 million employee options were exercised and an additional 22.6 million new options were granted. In future, and subject to the approval by the AGM, UBS will use conditional capital to cover newly granted employee options. For more information, read page 93.

Treasury shares held by the Investment Bank

The Investment Bank, acting as liquidity provider to the equity futures market and as a market maker in UBS shares and derivatives, has issued derivatives linked to UBS stock. Most of these instruments are classified as cash-settled derivatives and are held for trading purposes only. To hedge the economic exposure, a limited number of UBS shares are held by the Investment Bank.

The presentation in the table below does not include movements in UBS share positions held by the Investment Bank.

Treasury shares - statutory limit

Under the Swiss Stock Exchange Act, treasury shares held by the company must be reported once they rise above a certain threshold. UBS’s holding in its shares remained between 5% and 10% throughout 2005.