UBS’s performance is reported in accordance with Interna- tional Financial Reporting Standards (IFRS). Additionally, our results discussion and analysis comments on the underlying operational performance of our business, focusing on continuing operations insulated from the impact of discontinued activities and individual gain or loss items that are not relevant to our internal approach to managing the company. This includes items that we would not consider as indicative of our future potential performance and are therefore not included in our business planning decisions, and which are event- and UBS-specific, rather than industry-wide. It also helps to better assess our performance against peers and to estimate future growth potential.

In the last three years, two such items had a significant impact on our consolidated financial statements:

– In fourth quarter 2005, we sold our Private Banks & GAM unit to Julius Baer for a gain of CHF 3.7 billion after tax (pre-tax CHF 4.1 billion). The unit comprised the Banco di Lugano, Ehinger & Armand von Ernst and Ferrier Lullin private banks as well as specialist asset manager GAM. After the sale, we retained a stake of 20.7% in the new Julius Baer.

– A net gain of CHF 2 million (pre-tax CHF 161 million) in second quarter 2003 from the sale of the Wealth Management US Business Unit’s Correspondent Services Corporation (CSC) clearing business. A substantial portion of CSC’s net assets comprised goodwill stemming from the PaineWebber acquisition. After deducting taxes of CHF 159 million (based on the purchase price) and the writedown of the goodwill associated with CSC, the net gain from the transaction was CHF 2 million.

Up to and including 2004, we had provided comments and analysis on an adjusted basis that also excluded the amortization of goodwill and other acquired intangible assets. With the introduction of IFRS 3, Business Combinations, at the beginning of 2005, we ceased amortizing goodwill, which was by far the largest impact on our results. In our 2005 reporting, our result and analysis commentary compares current results to the prior year on a pre-goodwill basis. Accordingly, 2004 results in this report are analyzed on a pre-goodwill basis.

Seasonal characteristics

Our main businesses do not generally show significant seasonal patterns, except for the Investment Bank, where revenues are impacted by the seasonal characteristics of general financial market activity and deal flows in investment banking.

When discussing quarterly performance, we therefore compare the Investment Bank’s financial results of the reported quarter with those achieved in the same period of the previous year. Similarly, when considering the impact of the Investment Bank’s performance on UBS’s financial statements, we discuss our overall quarterly performance on a year-on-year basis – comparing the actual quarter with the same quarter in the previous year. Because of the volatile nature of market movements and the resulting business and trading opportunities, the market risk and balance sheet items in our Investment Bank are compared on a present quarter to previous quarter basis. For all other Business Groups and Units, recent quarterly results are compared to the previous quarter’s, as they are only slightly impacted by seasonal components such as asset withdrawals in fourth quarter and lower client activity levels related to the end of year holiday season.

Performance measures

UBS performance indicators

For the last six years, we have focused on a consistent set of four long-term performance indicators that are valid through periods of varying market conditions and designed to ensure that we deliver continuously improving returns to our shareholders. We have reported our performance against these indicators each quarter:

– We seek to increase the value of UBS by achieving a sustainable, after-tax return on equity of 15–20%

– We aim to increase shareholder value through double-digit average annual percentage growth in basic earnings per share (EPS)

– By cost reduction and earnings enhancement initiatives, we aim to manage UBS’s cost / income ratio at a level that compares positively with best-in-class competitors

– We aim to achieve a clear growth trend in net new money in our wealth management units.

As we have been steadily exceeding our performance indicators for some time now, we have decided to modify them for 2006 (for further details, see page 12).

Business Group Key Performance Indicators

At the Business Group or Business Unit level, our performance is measured by carefully chosen Key Performance Indicators (KPIs). They indicate the Business Group’s or Business Unit’s success in creating value for shareholders but do not disclose explicit targets. The KPIs show the key drivers of each unit’s core business activities and include financial metrics, such as cost / income ratios and invested assets, along with non-financial metrics, such as the number of client advisors.

These Business Group KPIs are used for internal performance measurement and planning as well as external reporting. This ensures management accountability for performance by the business leaders and consistency in external and internal performance measurement.

Client / invested assets reporting

Since 2001, we have reported two distinct metrics for client funds:

– Client assets are all client assets managed by or deposited with UBS including custody-only assets and assets held for purely transactional purposes.

– Invested assets is a more restrictive term and includes all client assets managed by or deposited with UBS for investment purposes.

Invested assets is our central measure and includes, for example, discretionary and advisory wealth management portfolios, managed institutional assets, managed fund assets and wealth management securities or brokerage accounts. It excludes all assets held for purely transactional and custody-only purposes as UBS only administers the assets and does not offer advice on how these assets should be invested. Since 1 January 2004, corporate client assets (other than pension funds) deposited with the Business Banking Switzerland unit have been excluded from invested assets, as we have a minimal advisory role for such clients and as asset flows are driven more by liquidity requirements than investment reasons. The same holds true for the corporate cash management business of the Wealth Management US unit, which we excluded from invested assets towards the end of 2005. Non-bankable assets (for example art collections) and deposits from third-party banks for funding or trading purposes are excluded from both measures.

Net new money is defined as the sum of the acquisition of invested assets from new clients, the loss of invested assets due to client defection and inflows and outflows of invested assets from existing clients. Net new money is calculated using the direct method, which is based on transactional level flows. Interest and dividend income, the effects of market or currency movements, fees and commissions as well as acquisitions and divestments are excluded from net new money. The use of invested assets to fund interest expense on clients’ loans results in net new money outflows. Reclassifications between invested assets and client assets as a result of a change in the service level delivered are treated as net new money flows.

When products are managed in one Business Group and sold in another, they are counted in both the investment management unit and the distribution unit. This results in double counting in UBS’s total invested assets as both units provide an independent service to their respective client, add value and generate revenues. Most double counting arises where mutual funds are managed by the Global Asset Management business and sold by Global Wealth Management & Business Banking. Both businesses involved count these funds as invested assets. This approach is in line with industry practice and our open architecture strategy and allows us to accurately reflect the performance of each individual business. Overall, CHF 332 billion of invested assets were double counted in 2005 (CHF 294 billion in 2004).