**As filed with theSecurities and Exchange Commission on June 28, 2006**

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 20-F**

(Mark One)

| o      |   | Registration statement pursuant to  Section 12(b) or 12(g) of the Securities Exchange Act of 1934 |
|--------|--------|------------------------------------------------------------------------------------------------------------------|
|   |   | or                                                                                                               |
| x      |   | Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934                 |
|   |   | For the  fiscal year ended December 31, 2005                                                                |
|   |   | or                                                                                                               |
| o      |   | Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934             |
|   |   | For the  transition period from __________ to ___________                                                        |
|   |   | or                                                                                                               |
| o      |   | Shell  Company report pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934          |
|   |   | Date of  event requiring this shell company report ___________                                                   |

 

Commission file number:            333-102040

**PERMANENT FINANCING (NO. 2)PLC**

(*Exact Name of Registrant 1as specified in its charter*)

**United Kingdom**

(*Jurisdiction of Incorporation or Organization*)

**35 Great St. Helen’s, London, EC3A 6AP,United Kingdom, (011 44 20) 7398 6300**

*(Addressof Principal Executive Offices*)

**PERMANENT FUNDING (NO. 1) LIMITED**

(*Exact Name of Registrant 2 as specified in its charter*)

**United Kingdom**

(*Jurisdiction of Incorporation or Organization*)

**35 Great St. Helen’s, London, EC3A 6AP,United Kingdom, (011 44 20) 7398 6300**

*(Addressof Principal Executive Offices*)

**PERMANENT MORTGAGES TRUSTEE LIMITED**

(*Exact Name of Registrant 3 as specified in its charter*)

**Jersey, Channel Islands**

(*Jurisdiction of Incorporation or Organization*)

**47 Esplanade, St. Helier, Jersey JE1 0BD,(011 44 1534) 510 924**

*(Addressof Principal Executive Offices*)

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Securitiesregistered or to be registered pursuant to Section 12(b) of the Act:                          None.

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act:                          None.

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:

Title of eachclass

$1,750,000,000 series 4 class A notes due December 2009

Series 4 termAAA advance(1)

Funding 1 interest in the mortgages trust(1)

Indicate thenumber of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

Not applicable.

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yes o   No x

If this report isan annual or transition report, indicate by check mark if the registrant is notrequired to file reports pursuant to section 13 or 15(d) of the SecuritiesExchange Act of 1934.

Yes o   No x

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes x   No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filed and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large AcceleratedFiler o   AcceleratedFiler o   Non-accelerated filer x

Indicate by checkmark which financial statement item the registrant has elected to follow.

Not applicable.

If this is anannual report, indicate by check mark whether the registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act)

Yes o   No x

Indicate by checkmark whether the registrant has filed all documents and reports required to befiled by Sections 12, 13 or 15(d) of the Securities Exchange Act of****1934 subsequent to the distribution ofsecurities under a plan confirmed by a court.

Not applicable.

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(1) These items have not been offered directly toinvestors. Permanent Mortgages Trustee Limited is the registrant for theFunding 1 interest in the mortgages trust and is holding the Funding interestin the mortgages trust on behalf of Permanent Funding (No. 1) Limited. TheFunding 1 interest in the mortgages trust is the primary source of payments onthe term advances listed. Permanent Funding (No. 1) Limited is the registrantfor the term advances and has issued the term advances to Permanent Financing(No. 2) PLC. The term advances are the primary source of payments on the series4 notes. Permanent Financing (No. 2) PLC is the registrant for the series 4notes.

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**PRESENTATIONOF INFORMATION**

This annual reporton Form 20-F relates to Permanent Financing (No. 2) PLC (the “issuer”)and the following securities (the “issuer notes”), which were issued pursuantto a trust deed dated March 6, 2003, (the “issuer trust deed”), betweenthe issuer and U.S. Bank National Association (since, succeeded by The Bank ofNew York), as note trustee (the “note trustee”):

·                  $1,750,000,000series 4 class A notes due December 2009

This annual reporton Form 20-F also relates to the following advances made pursuant tothe intercompany loan agreement dated March 6, 2003 (the “issuerintercompany loan agreement”), between the issuer, Permanent Funding (No. 1)Limited (“Funding 1”), U.S. Bank National Association (since, succeeded by TheBank of New York), as security trustee (the “security trustee”) and Citibank,N.A., as agent bank:

·                  1,107,250,000series 4 term AAA advance

This annual reporton Form 20-F further relates to Funding 1’s interest in themortgages trust, comprising, among other things, the portfolio of loans andtheir related security assigned to Permanent Mortgages Trustee Limited (the “mortgagestrustee”) by Halifax plc (the “seller”) on June 14, 2002, and on severalsubsequent dates any new loans and their new related security assigned to themortgages trustee by the seller after March 6, 2003 (the “closing” date),any increase in the outstanding principal balance of a loan due to the borrowertaking payment holidays or making underpayments under a loan or a borrowermaking a drawing under any flexible loan, any interest, principal and otheramounts (excluding third party amounts) paid by borrowers on their loans andtheir related security, the rights under the insurance policies that areassigned to the mortgages trustee or of which the mortgages trustee has thebenefit, and amounts on deposit and interest earned on the mortgages trusteeguaranteed investment contract. The mortgages trustee guaranteed investmentcontract, or GIC, account is the bank account in which the mortgages trusteeholds any cash that is part of the trust property until it is distributed tothe beneficiaries. Any actual losses in relation to the loans, any actualreductions occurring in respect of the loans and distributions of principalmade from time to time to the beneficiaries or the mortgages trust will bededucted from the trust property. The composition of the trust property willfluctuate as drawings under flexible loans and new loans are added and as theloans that were previously part of the trust property are repaid, mature,default or are repurchased by the seller.

Certain terms usedherein and not defined have the same meaning ascribed to such terms in theRegistration Statement filed on Form S-11 (the “RegistrationStatement”) relating to the securities (file number 333-102040).

Certain items in Form 20-Fare not applicable to annual reports filed on Form 20-F. Therefore,as used in this filing, “Not applicable to annual reports filed on Form 20-F”means that the response to the referenced item is omitted in reliance on theinstructions to Form 20-F published by the United States Securitiesand Exchange Commission (the “SEC”) as of the date of this annual report thatspecifically state that the item is inapplicable to annual reports filed on Form 20-F.

Certain items in Form 20-Fare not applicable to the issuer, Funding 1 or the mortgages trustee.Therefore, as used in this filing, “Not applicable” means the response to thereference item is omitted in reliance on the procedures outlined in numerousno-action letters issued by the staff of the SEC with respect to issuers ofsubstantially similar asset-backed securities that file annual reports on Form 10-K,or that the referenced item is otherwise not applicable.

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**FORWARD-LOOKINGSTATEMENTS**

This annual reportincludes forward-looking statements including, but not limited to, statementsmade under the “Risk Factors” section. These forward-looking statements can beidentified by the use of forward-looking terminology, such as the words “believes”,“expects”, “may”, “intends”, “should” or “anticipates”, or the negative orother variations of those terms. These statements involve known and unknownrisks, uncertainties and other important factors that could cause the actualresults and performance of the issuer notes, the seller or the UK residentialmortgage industry to differ materially from any future results or performanceexpressed or implied in the forward-looking statements. These risks,uncertainties and other factors include, among others: general economic andbusiness conditions in the UK; currency exchange and interest fluctuations;government, statutory, regulatory or administrative initiatives affecting theseller, changes in business strategy, lending practices or customerrelationships and other factors that may be referred to in this annual report.

Some of the mostsignificant of these risks, uncertainties and other factors are discussed inthe section of this annual report entitled “Risk Factors”. Investors areencouraged to carefully consider those factors prior to making an investmentdecision regarding the issuer notes.

**INCORPORATIONOF CERTAIN DOCUMENTS BY REFERENCE**

Each of theissuer, Funding 1 and the mortgages trustee incorporates by reference itsperiodic filings on Form 6-K, which contain all financialinformation relating to the securities relevant to the holders of the issuernotes.

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**PART I**

**Item 1. Identity of Directors,Senior Management and Advisers**

Not applicable toannual reports filed on Form 20-F.

**Item 2. Offer Statistics andExpected Timetable**

Not applicable toannual reports filed on Form 20-F.

**Item 3. Key Information**

A.*           Selected FinancialData*

Each of theissuer, Funding 1 and the mortgages trustee incorporates by reference andattaches hereto as exhibits the following reports, filed on Form 6-K,which include all financial information relating to the securities that isrelevant to holders of the issuer notes:

·                  Investor’s Report for the month of January 2005

·                  Investor’s Report for the month of February 2005

·                  Investor’s Report for the month of March 2005

·                  Investor’s Report for the month of April 2005

·                  Investor’s Report for the month of May 2005

·                  Investor’s Report for the month of June 2005

·                  Investor’s Report for the month of July 2005

·                  Investor’s Report for the month of August 2005

·                  Investor’s Report for the month of September 2005

·                  Investor’s Report for the month of October 2005

·                  Investor’s Report for the month of November 2005

·                  Investor’sReport for the month of December 2005

B.*            Capitalization andIndebtedness*

Not applicable toannual reports filed on Form 20-F.

C.*            Reasons for the Offerand Use of Proceeds*

Not applicable toannual reports filed on Form 20-F.

D*.            Risk Factors*

*Thissection describes the principal risk factors associated with an investment inthe issuer notes. Investors considering purchasing the issuer*notes*should carefully read and think about all the information contained inthis document, including the risk factors set out here, prior to making anyinvestment decision.*

**Noteholderscannot rely on any person other than the issuer to make payments on the issuernotes**

The issuer notesdo not represent an obligation and are not the responsibility of any of Halifaxplc or any of its affiliates, underwriters, managers, the mortgages trustee,the note trustee or any other party to the transaction other than the issuer.

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**Theissuer has a limited set of resources available to it to make payments on theissuer notes**

The issuer’sability to make payments of principal and interest on the issuer notes and topay its operating and administrative expenses will depend primarily on thefunds being received under the issuer intercompany loan. In addition, theissuer will rely on the issuer dollar currency swaps and the issuer eurocurrency swaps to provide payments on the issuer notes denominated in USdollars and euro, respectively.

Noteholders shouldnote that there is no liquidity facility directly available to the issuer,although Funding 1 has the benefit of a liquidity facility to pay interest onthe issuer term advances corresponding to the issuer notes and to pay principalon the class A issuer notes (save as described below) and the series 5 class Aissuer notes. In the event that the seller suffers certain ratings downgrades,Funding 1 will be required to fund the liquidity reserve fund, though there canbe no assurance that Funding 1 will have sufficient resources to do so at suchtime, and Funding 1 may draw money from the liquidity reserve fund, to theextent it has been funded, to pay amounts due to the issuer. The ability ofFunding 1 to draw on the Funding 1 liquidity facility is subject to satisfyingcertain conditions precedent.

In addition to theissuer, all relevant issuers (including the previous issuer and, as they areestablished, each new issuer) have or will have an indirect interest in theFunding 1 liquidity facility (the Funding 1 liquidity facility will beavailable to meet interest and principal obligations of Funding 1 to theprevious issuer and new issuers, subject to certain conditions precedent). If adrawing is made under the Funding 1 liquidity facility to enable Funding 1 tomeet its obligations to the previous issuer or to new issuers, then that mayaffect the amount of funds available to Funding 1 to meet its obligations tothe issuer.

The issuer willnot have any other significant sources of funds available to meet itsobligations under the issuer notes and/or any other payments ranking inpriority to the issuer notes.

**Funding 1is not obliged to make payments on the issuer term advances if it does not haveenough money to do so, which could adversely affect payments on the issuernotes**

Funding 1’sability to pay amounts due on the issuer term advances will depend upon:

·                  Funding1 receiving enough funds from its entitlement to the trust property on orbefore each Funding 1 interest payment date;

·                  Funding1 receiving the required funds from the Funding 1 swap provider;

·                  theamount of funds credited to the general reserve fund;

·                  theamount of funds credited to the liquidity reserve fund;

·                  Funding1 making drawings as permitted under the Funding 1 liquidity facility; and

·                  theallocation of funds between the issuer term advances, the previous termadvances and any new term advances.

According to theterms of the mortgages trust deed, the mortgages trustee is obliged to pay toFunding 1 the Funding 1 share percentage of revenue receipts on theloans by crediting those amounts to the Funding 1 GIC account on eachdistribution date. The mortgages trustee is obliged to pay Funding 1 principalreceipts on the loans by crediting those amounts to the Funding 1 GIC accountas and when required pursuant to the terms of the mortgages trust deed.

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Funding 1will be obliged to pay revenue receipts due to the issuer under the issuerintercompany loan only to the extent that it has revenue receipts left overafter making payments ranking in priority to the issuer, such as payments ofcertain fees and expenses of Funding 1 and payments on certain term advances(under any intercompany loan agreement) with higher ranking designations.

Funding 1 will beobliged to pay principal receipts due to the issuer under the issuerintercompany loan only to the extent that it has principal receipts availablefor that purpose after repaying amounts ranking in priority to the issuer(including repaying any previous term advances or new term advances with higherrating designations).

If there is ashortfall between the amounts payable by Funding 1 to the issuer under theissuer intercompany loan agreement and the amounts payable by the issuer on theissuer notes, the noteholders may, depending on what other sources of funds areavailable to the issuer and to Funding 1, not receive the full amount ofinterest and/or principal which would otherwise be due and payable on theissuer notes.

**Failureby Funding 1 to meet its obligations under the issuer intercompany loanagreement would adversely affect payments on the issuer notes**

If Funding 1 doesnot make payments due and payable on the issuer intercompany loan, then theissuer may not have enough money to make payments on the issuer notes, and inaddition the issuer will have only limited recourse to the assets of Funding 1.If Funding 1 does not pay amounts under the issuer intercompany loan because itdoes not have enough money available, those amounts will be deemed not to bedue and payable, so there will not be an event of default under the issuerintercompany loan, and the issuer will not have recourse to the assets ofFunding 1 in that instance.

**On thefinal repayment date of the issuer intercompany loan any outstanding amounts inrespect of the issuer term AA advances and the issuer term BBB advances will beextinguished, which would cause a loss on any class B issuer notes and anyclass C issuer notes still outstanding**

The transactionhas been structured in the expectation that on the final repayment date of theissuer intercompany loan in June 2042, the interest and principal due andpayable on the issuer term AA advances and the issuer term BBB advances will bein an amount equal to the sum available to pay all outstanding interest and/orprincipal (including interest and/or principal deferred and unpaid) on theissuer term AA advances and the issuer term BBB advances (after paying amountsof a higher order of priority as required by the Funding 1 priority ofpayments).

If there is ashortfall between the amount available to pay the interest and/or principal andthe amount required to pay all outstanding interest and/or principal on theissuer term AA advances and the issuer term BBB advances, then the shortfallwill be deemed to be not due and payable under the issuer intercompany loanagreement and the issuer will not have any claim against Funding 1 for theshortfall.

If there is ashortfall in interest and/or principal payments under the issuer intercompanyloan agreement, the noteholders may not receive the full amount of interestand/or principal which would otherwise be due and payable on the class B issuernotes or the class C issuer notes outstanding.

**Enforcementof the issuer security is the only remedy for a default in the issuer’sobligations, and the proceeds of that enforcement may not be enough to makepayments on the issuer notes**

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The only remedyfor recovering amounts on the issuer notes is through the enforcement of theissuer security. The issuer has no recourse to the assets of Funding 1 unlessFunding 1 has also defaulted on its obligations under the issuer intercompanyloan and the Funding 1 security has been enforced.

If the securitycreated as required by the issuer deed of charge is enforced, the proceeds ofenforcement may be insufficient to pay all principal and interest due on theissuer notes.

**Thetransaction has been structured in the expectation that the series 4 issuernotes will be redeemed before the series 5 issuer notes**

The transaction has beenstructured in the expectation that the series 4 issuer notes will be redeemedin full prior to the redemption of the series 5 issuer notes.

This means, amongother things, that the series 4 class B issuer notes and the series 4 class Cissuer notes are expected to be redeemed before the series 5 class A issuernotes, , even though the series 5 class A issuer notes have a higher ratingthat the series 4 class B issuer notes and the series 4 class C issuer notes.However, there is no assurance that the series 4 issuer notes will be redeemedin full before the series 5 issuer notes. In each case, redemption of theissuer notes is ultimately dependent on, among other things, repayment andredemptions on the loans and on the rating designation of the issuer termadvances.

Further, if on anyinterest payment date, amounts are due and payable in respect of the class Aissuer notes of any series and amounts are payable in respect of the class Bissuer notes of any series and/or the class C issuer notes of any series, thenpayments of principal will be made on the class A issuer notes in priority topayments of principal on the class B issuer Notes and the class C issuer notes.Similarly, if on any interest payment date, amounts are payable in respect ofthe class B issuer notes of any series and the class C issuer notes of anyseries, then payments of principal will be made on the class B issuer notes inpriority to payments of principal on the class C issuer notes.

**There maybe conflicts between the noteholders’ interests and the interests of any of theissuer’s other secured creditors, and the interests of those secured creditorsmay prevail over the noteholders’ interests**

The issuer deed ofcharge requires the security trustee to consider the interests of each of theissuer secured creditors in the exercise of all of its powers, trusts,authorities, duties and discretions, but requires the security trustee, in theevent of a conflict between the noteholders’ interests and the interests of anynote holders  with a higher classdesignation and the interests of noteholders with a lower class designation orany of  the other issuer secured creditors,to consider only the noteholders’ interests with a higher class designation. **The security trustee may agree modifications to the issuer transactiondocuments without the noteholders’ prior consent, which may adversely affectthe noteholders’ interests**

Pursuant to theterms of the Funding 1 deed of charge and the issuer deed of charge, thesecurity trustee may, without the consent or sanction of Funding 1’s securedcreditors or the issuer’s secured creditors, concur with any person in makingor sanctioning any modifications to the transaction documents:

·                  whichin the opinion of the security trustee it may be expedient to make, providedthat the security trustee is of the opinion that the modification will not bematerially prejudicial to the interests of the secured creditors or, if it isnot of that opinion in relation to any secured creditor, the secured creditorhas given its written consent to the modification; or

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·                  whichin the opinion of the security trustee is made to correct a manifest error oran error established as such to the satisfaction of the security trustee or isof a formal, minor or technical nature.

The securitytrustee will be entitled to assume that the exercise of its discretion will notbe materially prejudicial to the noteholders’ interests if each of the ratingagencies has confirmed that the then current rating by it of the notes wouldnot be adversely affected by such exercise.

In addition, thesecurity trustee will give its consent to any modifications to the mortgage saleagreement, the servicing agreement, the cash management agreement, the Funding1 deed of charge, the Funding 1 liquidity facility agreement, the Funding 1swap agreement, the intercompany loan terms and conditions, the bank accountagreement and the master definitions and construction schedule, that arerequested by Funding 1 or the cash manager, provided that Funding 1 or the cashmanager certifies to the security trustee in writing that the modifications arerequired in order to accommodate:

i)                 the entry by Funding 1 into new intercompany loanagreements and/or the issue of new types of notes by new issuers and/or theaddition of other relevant creditors to the transaction;

ii)              the inclusion ofPermanent Funding (No. 2) PLC (“Funding 2”) as a beneficiary of themortgages trust;

iii)           the issue of new notesby Funding 2;

iv)          the sale of new types ofloans to the mortgages trustee;

v)             changes to be made tothe general reserve fund required amount, the liquidity reserve fund requiredamount and/or the manner in which the reserve funds are funded;

vi)          changes to be made tothe definitions of asset trigger event and non-asset trigger event; and

vii)       the inclusion of anadditional Funding 1 liquidity facility;

and provided furtherthat:

·                  inrespect of the matters listed in paragraphs (i) to (iv), the relevantconditions precedent to, as applicable, the addition of new issuers, theinclusion of Funding 2 as a beneficiary of the mortgages trust or the sale ofnew loans to the mortgages trustee, have been satisfied; and

·                  inrespect of the matters listed in paragraphs (i) to (vii), the securitytrustee has received written confirmation from each of the rating agencies thatthe relevant modifications will not adversely affect the then current ratingsof the notes.

The modificationsrequired to give effect to the matters listed in paragraphs (i) to (vii) abovemay include, *inter alia*, amendments to theprovisions of the Funding 1 deed of charge relating to the application ofmonies. Accordingly, there can be no assurance that the effect of themodifications to the transaction documents will not ultimately adversely affectnoteholders’ interests. Any modifications to the documents described above willrequire the actual consent of the Funding 1 liquidity facility provider, theFunding 1 swap provider and each of the issuer swap providers (in respect ofeach document to which they are a party), as applicable, such consent not to be

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unreasonably withheld andto be deemed given if no written response (affirmative or negative) is givenwithin ten business days after the written request for consent is sent to eachsuch party.

**There maybe a conflict between the interests of the holders of class A issuer notes, theholders of class B issuer notes and the holders of class C issuer notes, andthe interests of one class of noteholders may prevail over the interests ofother classes of noteholders**

The issuer trustdeed and the terms of the issuer notes provide that the note trustee is to haveregard to the interests of the holders of all the classes of issuer notes.There may be circumstances, however, where the interests of one class ofnoteholders conflict with the interests of another class or classes ofnoteholders. The issuer trust deed and the terms of the issuer notes provide thatwhere, in the opinion of the note trustee, there is a conflict, then:

·                  thenote trustee is to have regard only to the interests of the class A noteholdersin the event of a conflict between the interests of the class A noteholders onthe one hand and the class B noteholders and/or the class C noteholders on theother hand; and

·                  thenote trustee is to have regard only to the interests of the class B noteholdersin the event of a conflict between the interests of the class B noteholders onthe one hand and the class C noteholders on the other hand.

**There maybe a conflict between the interests of the holders of each series of the classA issuer notes, the holders of each series of the class B issuer notes and theholders of each series of the class C issuer notes, and the interests of oneseries of noteholders may prevail over the interests of other series ofnoteholders**

There may also becircumstances where the interests of the class A noteholders of one series ofthe issuer notes conflict with the interests of the class A noteholders ofanother series of the issuer notes. Similarly, there may be circumstances wherethe interests of the class B noteholders of one series of the issuer notesconflict with the interests of the class B noteholders of another series of theissuer notes or the interests of the class C noteholders of one series of theissuer notes conflict with the interests of the class C noteholders of anotherseries of the issuer notes.

The issuer trustdeed and the terms of the issuer notes will provide that where, in the soleopinion of the note trustee, there is a conflict, then a resolution directingthe note trustee to take any action must be passed at separate meetings of theholders of each series of the class A issuer notes, or, as applicable, eachseries of the class B issuer notes or each series of the class C issuer notes.A resolution may only be passed at a single meeting of noteholders of eachseries of the relevant class if the note trustee is, in its absolutediscretion, satisfied that there is no conflict between them.

Similar provisionswill apply in relation to requests in writing from holders of a specifiedpercentage of the principal amount outstanding of the issuer notes of eachclass within each series (the principal amount outstanding being converted intosterling for the purposes of making the calculation). Noteholders should notethat, as a result of repayments of principal first to the series 4 issuer notesand then to the series 5 issuer notes, the principal amount outstanding of eachseries of the issuer notes will change after the closing date.

**PermanentHoldings Limited (“Holdings”) has established another company, Funding 2, whichmay become an additional beneficiary under the mortgages trust**

Holdings hasestablished a separate entity, Funding 2, which may issue new notes from timeto time and use the proceeds to pay for a direct interest in the trust propertyrather than lending the proceeds to Funding 1. Simultaneously with theacquisition by Funding 2 of an interest in the trust property, the seller andFunding 1, as existing beneficiaries of the mortgages trust, would be required 

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to agree to a decrease intheir beneficial interests in the trust property (which would require a partialrelease of security by Funding 1 over its share in the trust property).

The seller,Funding 1 and Funding 2 would each have a joint and undivided interest in thetrust property but their entitlement to the proceeds from the trust propertywould be in proportion to their respective shares of the trust property. Oneach distribution date the mortgages trustee would distribute interest andprincipal receipts to one, two or all three beneficiaries, depending on theterms of the mortgages trust.

It is anticipatedthat Funding 2 will issue notes directly or indirectly to investors from timeto time backed by its share of the trust property. Noteholders would not have adirect or indirect interest in Funding 2’s share of the trust property.

Amendments wouldbe made to a number of the issuer transaction documents as a result of theinclusion of Funding 2 as a beneficiary of the mortgages trust. In particular(but without limitation), amendments would be made to:

·                  the mortgagesale agreement to enable the purchase by Funding 2 of interests in the trustproperty;

·                  themortgages trust deed (i) to establish Funding 2 as a beneficiary of thetrust, (ii) to enable the acquisition by Funding 2 of an interest in thetrust property from time to time and (iii) to regulate the distribution ofinterest and principal receipts in the trust property to Funding 2 and theother beneficiaries;

·                  thecash management agreement to regulate the application of monies to Funding 2;

·                  theservicing agreement to ensure that Funding 2 receives the benefit of theservicers duties under that agreement; and

·                  themaster definitions and construction agreement.

In addition,Funding 1, Funding 2 and the seller may enter into new agreements to regulatethe making of decisions between them.

There may beconflicts of interest between Funding 1 and Funding 2, in which case it isexpected that the mortgages trustee will follow the directions given by therelevant beneficiary (excluding the seller) that has the largest share of thetrust property at that time. The interests of Funding 1 may not prevail, whichmay adversely affect the noteholders’ interests.

Noteholders’ priorconsent to the inclusion of Funding 2 as a beneficiary of the mortgages trustand the subsequent amendments to the documents and/or release of security byFunding 1 will not be obtained. Before becoming a beneficiary of the mortgagestrust, however, Funding 2 will be required to satisfy a number of conditions,including:

·                  obtaininga written confirmation from each of the rating agencies that the then currentratings of the notes outstanding at that time will not be adversely affected asa result of Funding 2 becoming a beneficiary of the mortgages trust;

·                  providingwritten certification to the security trustee that no event of default underany of Funding 1’s intercompany loan agreements outstanding at that time hasoccurred which has not been remedied or waived and no event of default willoccur as a result of Funding 2 becoming a beneficiary of the mortgages trust;and

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·                  providingwritten certification to the security trustee that no principal deficiency isrecorded on the principal deficiency ledger in relation to Funding 1’s termadvances that are outstanding at that time.

There can be noassurance that the inclusion of Funding 2 as a beneficiary of the mortgagestrust would not affect cashflows available to pay amounts due on thenoteholders’ issuer notes and therefore adversely affect the noteholders’interests.

**IfFunding 1 enters into new intercompany loan agreements, then the new termadvances may rank ahead of issuer term advances as to payment, and accordinglynew notes may rank ahead of the issuer notes as to payment**

Since the closingdate, Holdings has established new issuers to issue new notes to investors, andit is likely that Holdings will establish additional new issuers in the future.The proceeds of each new issue will be used by the new issuer to make a newintercompany loan to Funding 1. Funding 1 will use the proceeds of the newintercompany loan either to:

·                  paythe seller in relation to the initial consideration for new loans and theirrelated security to be assigned to the mortgages trustee;

·                  paythe seller for a portion of the seller share of the trust property to beassigned to Funding 1, which will result in an increase in Funding 1’s share ofthe trust property;

·                  refinancein whole or in part an intercompany loan or intercompany loans outstanding atthat time (and if the issuer’s intercompany loan to Funding 1 is refinanced,noteholders could be repaid early); and/or

·                  depositsome of those proceeds in the general reserve fund.

The payment andsecurity priorities of the issuer notes relative to each other as set out inthe issuer deed of charge and the issuer cash management agreement will not beaffected as a result of an issue of new notes by a new issuer, because that newissue will be constituted by separate documents which do not affect the issuerdeed of charge or the issuer cash management agreement. However, Funding 1 maybe required to repay to a new issuer amounts owing under a new term advanceahead of or in the same order of priority as amounts owing to the issuer on theissuer term advances, depending on the rating designation and the scheduledrepayment date of that new term advance and certain other rules regardingthe repayment of principal by Funding 1. If this is the case, then the relevantnew noteholders will be paid before the noteholders.

If Holdingsestablishes new issuers to make new intercompany loans to Funding 1, thenoteholders will not have any right of prior review or consent with respect tothose new intercompany loans or the corresponding issuance by new issuers ofnew notes. Similarly, the terms of the Funding 1 transaction documents(including the mortgage sale agreement, the mortgages trust deed, the Funding 1deed of charge, the definitions of the trigger events, the criteria for thesale of new loans to the mortgages trustee and the amount available to be drawnunder the Funding 1 liquidity facility) may be amended to reflect the newissue. Noteholders’ consent to these changes will not be required. There can beno assurance that these changes will not affect the cashflows available to payamounts due on the issuer notes.

However, beforeissuing new notes, a new issuer will be required to satisfy a number of conditions,including:

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·                  obtaininga written confirmation from each of the rating agencies that the then currentratings of the notes outstanding at that time will not be adversely affectedbecause of the new issue;

·                  providingwritten certification to the security trustee that no event of default underany of the intercompany loan agreements outstanding at that time has occurredwhich has not been remedied or waived and no event of default will occur as aresult of the issue of the new notes; and

·                  providingwritten certification to the security trustee that no principal deficiency isrecorded on the principal deficiency ledger in relation to the term advancesoutstanding at that time.

**Funding 1has entered into other intercompany loan agreements with other issuers, andsome of the term advances in the other intercompany loans rank ahead of some ofthe issuer term advances in the issuer intercompany loan as to payment, andaccordingly some of the notes issued by the other issuers rank ahead of some ofthe issuer notes as to payment**

The other issuers issued notes to investors, the sterling equivalent ofthe net issue proceeds of which were used by the other issuers to makeintercompany loans to Funding 1. Funding 1 used most of the proceeds of theseintercompany loans to pay the seller for the initial loans (together with theirrelated security) that it assigned to the mortgages trustee on the initialclosing date, which comprised Funding 1’s original share of the trust property.Funding 1 used most of the proceeds of each other issuers’ intercompany loan topay the seller for loans (together with their related security) sold to themortgages trustee or to pay consideration to the seller for an increase inFunding 1’s share in the mortgages trust.

The payment and security priorities of the issuer notes relative to eachother as set out in the issuer deed of charge and the issuer cash managementagreement are not affected as a result of the issue of notes by the otherissuers, because the other issues were constituted by separate documents whichdo not affect the issuer deed of charge or the issuer cash managementagreement. However, Funding 1 may be required to pay to the other issuersamounts that are owing under one or more term advances ahead of or in the sameorder of priority as amounts owing to the issuer on the issuer term advances,depending on the rating designation, the scheduled repayment date of that termadvance and other rules regarding the payment of interest and therepayment of principal by Funding 1. If this is the case then the othernoteholders will be paid before the holders of the issuer notes.

**Othercreditors will share in the same security granted by Funding 1 to the issuer,and this may adversely affect payments on the issuer notes**

If Funding 1enters into a new intercompany loan agreement, then if required it will alsoenter into a new start-up loan agreement with new start-up loan providers andthe security trustee.

If required by therating agencies, Funding 1 will use part of the proceeds of the new start-uploan to fund further the general reserve fund. Similarly, if necessary, Funding1 will also enter into a new Funding 1 swap with either the Funding 1 swapprovider or a new Funding 1 swap provider and the security trustee.

The new issuer,any new start-up loan provider and any new Funding 1 swap provider will becomeparty to the Funding 1 deed of charge and will be entitled to share in thesecurity granted by Funding 1 for its benefit (and the benefit of the otherFunding 1 secured creditors) under the Funding 1 deed of charge. In addition,the liabilities owed to the Funding 1 liquidity facility provider and theFunding 1 swap provider which are secured by the Funding 1 deed of charge mayincrease each time that Funding 1 enters into a new intercompany loanagreement. Those factors could ultimately cause a 

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reduction in the paymentsnoteholders receive on the issuer notes. Noteholders’ consent to the requisitechanges to the transition documents will not be required.

**There maybe conflicts between the issuer and any new issuers, and the issuer’s interestsmay not prevail, which may adversely affect payments on the issuer notes**

The securitytrustee will exercise its rights under the Funding 1 deed of charge only inaccordance with directions given by the issuers (which could be the issuer and,if Funding 1 enters into new intercompany loans, any new issuer) that have thehighest rating designation at that time, provided that the security trustee isindemnified and/or secured to its satisfaction.

If the securitytrustee receives conflicting directions, it will follow the directions given bythose relevant issuers representing the largest principal amount outstanding ofthe term advances with the highest rating designation. If the issuer is not inthe group representing that largest principal amount, then its interests maynot prevail. This could ultimately cause a reduction in the payments thenoteholders receive on the issuer notes. For example, if the term advances withthe highest rating designation at the time of a direction are the term AAAadvances, then in the event of conflicting direction being given by issuerswith outstanding term AAA advances, the security trustee will follow thedirection given by those issuers holding the largest principal amountoutstanding of term AAA advances.

**As newloans are sold to the mortgages trustee, the characteristics of the trustproperty may change from those existing at the closing date, and those changesmay adversely affect payments on the issuer notes**

There is noguarantee that any new loans sold to the mortgages trustee will have the samecharacteristics as the loans in the initial portfolio as of the closing date.In particular, new loans may have different payment characteristics than theloans in the initial portfolio as of the closing date. The ultimate effect ofthis could be to delay or reduce the payments the noteholders receive on theissuer notes.

**The yieldto maturity of the issuer notes may be adversely affected by prepayments orredemptions on the loans**

The yield tomaturity of the issuer notes of each class will depend mostly on (a) theamount and timing of payment of principal on the loans and (b) the pricepaid by noteholders of each class of issuer notes. The yield to maturity of theissuer notes of each class may be adversely affected by a higher or lower thananticipated rate of prepayments on the loans.

No assurance canbe given that Funding 1 will accumulate sufficient funds during the cashaccumulation period relating to the issuer series 4 term AAA advance to enableit to repay this issuer term advance to the issuer so that the correspondingclasses of issuer notes will be redeemed in their entirety on their scheduledredemption dates.

During the cashaccumulation period for the issuer term advances and scheduled amortizationinstallments, repayments of principal will only be made on the issuer series 5term AAA advance, the issuer term AA advances or the issuer term BBB advancesthat are due and payable if the quarterly CPR of the loans in the trustproperty is greater than 15 per cent. and certain other conditions are met.This means that there may be no corresponding repayments of principal on theseries 5 class A issuer notes, the class B issuer notes or the class C issuer notes.

The extent towhich sufficient funds are saved by Funding 1 during a cash accumulation periodor received by it from its share in the mortgages trust on a scheduledrepayment date will depend on whether the actual principal prepayment rate ofthe loans is the same as the assumed principal prepayment rate. If Funding 1 isnot able to save enough money during a cash accumulation 

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period or does notreceive enough money from its share in the mortgages trust on a scheduledrepayment date to repay the relevant issuer term AAA advance (and if it isunable to make a drawing on the Funding 1 liquidity facility or the reservefund to make good the shortfall) so that the issuer can redeem the class Aissuer notes of the corresponding series on their respective scheduledredemption date(s), then Funding 1 will be required to pay to the issuer onthose scheduled redemption dates only the amount that it has actually saved orreceived. Any shortfall will be deferred and paid on subsequent Funding 1interest payment dates when Funding 1 has money available to make the payment.In these circumstances there will be a variation in the yield to maturity ofthe relevant class of issuer notes.

**Theissuer’s ability to redeem the series   4class A issuer notes on their scheduled redemption dates is affected by therate of prepayment on the loans**

The rate ofprepayment of loans is influenced by a wide variety of economic, social andother factors, including prevailing mortgage market interest rates, theavailability of alternative financing programs, local and regional economicconditions and homeowner mobility. For instance, prepayments on the loans maybe due to borrowers refinancing their loans and sales of propertiesby borrowers (either voluntarily or as a result of enforcement actiontaken). In addition, if the seller is required to repurchase a loanor loans under a mortgage account and their related security because, forexample, one of the loans does not comply with the loan warranties in themortgage sale agreement, then the payment received by the mortgages trusteewill have the same effect as a prepayment of all of the loans under themortgage account. Because these factors are not within its control or thecontrol of Funding 1 or the mortgages trustee, the issuer cannot give anyassurances as to the level of prepayments that the portfolio may experience.

Variation in therate of prepayments of principal on the loans may affect each class of theissuer notes differently depending upon amounts already repaid by Funding 1 tothe issuer under the issuer intercompany loan and whether a trigger event hasoccurred, or a loan is subject to a product switch or a further advance or thesecurity granted by the issuer under the issuer deed of charge has beenenforced. If prepayments on the loans occur less frequently than anticipated,then there may not be sufficient funds available to redeem the series  4 class A issuer notes in full on theirscheduled redemption dates.

**Theseller may change the lending criteria relating to loans that are subsequentlyassigned to the mortgages trustee, which could affect the characteristics ofthe trust property and which may adversely affect payments on the issuer notes**

Each of the loanswas originated in accordance with the seller’s lending criteria at the time oforigination. These lending criteria consider a variety of factors such as apotential borrower’s credit history, employment history and status andrepayment ability, as well as the value of the property to be mortgaged. In theevent of the sale of any new loans and new related security to the mortgagestrustee, the seller will warrant that those new loans and new related securitywere originated in accordance with the seller’s lending criteria at the time oftheir origination. However, the seller retains the right to revise its lendingcriteria as determined from time to time, and so the lending criteriaapplicable to any loan at the time of its origination may not be or have beenthe same as those when other loans were originated. If new loans that have beenoriginated under revised lending criteria are sold to the mortgages trustee,the characteristics of the trust property could change. This could lead to adelay or a reduction in the payments received on the issuer notes.

**Theseller has adopted procedures relating to investigations and searches forremortgages which could affect the characteristics of the trust property andwhich may adversely affect payments on the issuer notes**

The seller doesnot require a solicitor, licensed conveyancer or (in Scotland) qualifiedconveyancer to conduct a full investigation of the title to a property in allcases. Where the borrower 

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is remortgaging therewill be a limited investigation to carry out some but not all of the searchesand investigations which would normally be carried out by a solicitorconducting a full investigation of the title to a property. Properties whichhave undergone such a limited investigation may be subject to matters whichwould have been revealed by a full investigation of title and which may havebeen remedied or, if incapable of remedy, may have resulted in the propertiesnot being accepted as security for a loan had the matters been revealed, thoughto mitigate against this risk search indemnity insurance is obtained in respectof the properties. The introduction of loans secured by the properties into thetrust property could result in a change of the characteristics of the trustproperty. This could lead to a delay or a reduction in the payments received onthe issuer notes.

**Thetiming and amount of payments on the loans could be affected by various factorsthat may adversely affect payments on the issuer notes**

The loans areaffected by credit, liquidity and interest rate risks. Various factorsinfluence mortgage delinquency rates, prepayment rates, repossession frequencyand the ultimate payment of interest and principal, such as changes in thenational or international economic climate, regional economic or housingconditions, changes in tax laws, interest rates, inflation, the availability offinancing, yields on alternative investments, political developments andgovernment policies. Other factors in borrowers’ individual, personal orfinancial circumstances may affect the ability of borrowers to repay loans.Loss of earnings, illness, divorce and other similar factors may lead to anincrease in delinquencies by and bankruptcies of borrowers, and couldultimately have an adverse impact on the ability of borrowers to repay loans.

If a borrowerfails to repay its loan and the related property is repossessed, the likelihoodof there being a net loss on disposition of the property is adversely affectedby a higher debt-to-value ratio. In addition, the ability of a borrower to sella property given as security for a loan at a price sufficient to repay theamounts outstanding under the loan will depend upon a number of factors,including the availability of buyers for that property, the value of thatproperty and property values in general at the time. As at January 1,2006, 2.88 per cent. of the loans had a loan-to-value ratio of at least 90 percent.

The portfolio mayalso be subject to geographic concentration risks. To the extent that specificgeographic regions within the United Kingdom have experienced or may experiencein the future weaker regional economic conditions and housing markets thanother regions, a concentration of the loans in such a region may be expected toexacerbate all of the risks relating to the loans described in this section.The economy of each geographic region within the United Kingdom is dependent ondifferent mixtures of industries. Any downturn in a local economy or particularindustry may adversely affect the regional employment levels and consequentlythe repayment ability of the borrowers in that region or the region that reliesmost heavily on that industry. Any natural disasters in a particular region mayreduce the value of affected mortgaged properties. This may result in a lossbeing incurred upon sale of the mortgaged property. These circumstances couldaffect receipts on the loans and ultimately result in losses on the issuernotes.

Further, themortgage loan industry in the United Kingdom is highly competitive. Thiscompetitive environment may affect the rate at which the seller originates newloans and may also affect the level of attrition of the seller’s existingborrowers.

The principalsource of income for repayment of the issuer notes by the issuer is the issuerintercompany loan. The principal source of income for repayment by Funding 1 ofthe issuer intercompany loan is its interest in the loans held on trust by themortgages trustee for Funding 1 and the seller. If the timing and payment ofthe loans is adversely affected by any of the risks described in this section,the payments on the issuer notes could be reduced or delayed.

**Theoccurrence of trigger events and enforcement of the issuer security mayadversely affect the scheduled redemption dates of the series 4 class A issuernotes**

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If no triggerevent has occurred and the issuer security has not been enforced in accordancewith the terms of the issuer deed of charge, then payments of principal willnot occur on the series 4 class A issuer notes before their respectivescheduled redemption dates.

If a trigger eventoccurs or the issuer security is enforced in accordance with the issuer deed ofcharge prior to the scheduled redemption dates for the series 4 class A issuernotes, then the relevant classes of issuer notes outstanding will not be repaidon their scheduled redemption dates but will be repaid on each interest paymentdate from monies received from Funding 1 on the issuer term AAA advances of thecorresponding series as described in the following three risk factors.

**If anasset trigger event occurs, any series 4 class A issuer notes then outstandingwill not be repaid on their scheduled redemption dates**

When an assettrigger event has occurred, the mortgages trustee will distribute principalreceipts on the loans to Funding 1 and the seller proportionally and equallybased on their percentage shares of the trust property (that is, the Funding 1share percentage and the seller share percentage). When an asset trigger eventhas occurred, Funding 1 will repay (after making requisite payments to theFunding 1 liquidity facility provider and to replenish the reserve fund):

*first*,the issuer term AAA advances in respect of the issuer intercompany loan, theprevious intercompany loans and any new intercompany loans, until all of thoseterm AAA term advances are fully repaid;

*then*,the issuer term AA advances in respect of the issuer intercompany loan, theprevious intercompany loans and any new intercompany loans, until all of thoseterm AA term advances are fully repaid;

*then*,the issuer term A advances in respect of the previous intercompany loans andany new intercompany loans, until all of those term A term advances are fullyrepaid; and

*finally*,the issuer term BBB advances in respect of the issuer intercompany loan, theprevious intercompany loans and any new intercompany loans, until all of thoseterm BBB term advances are fully repaid.

If an assettrigger event occurs, any series 4 class A issuer notes then outstanding willnot be repaid on their scheduled redemption dates, and there is also a riskthat they will not be repaid by their final maturity dates.

**If anon-asset trigger event occurs, any series 4 class A issuer notes thenoutstanding will not be repaid on their scheduled redemption dates**

If a non-assettrigger event has occurred but an asset trigger event has not occurred, themortgages trustee will distribute all principal receipts to Funding 1 until theFunding 1 share percentage of the trust property is zero. When a non-assettrigger event has occurred, Funding 1 will repay (after making requisitepayments to the Funding 1 liquidity facility provider and to replenish thereserve funds):

*first*,the term AAA advance with the earliest final repayment date, then to repay theterm AAA advance with the next earliest final repayment date, and so on untilthe term AAA advances in respect of the issuer intercompany loan, the previousissuer intercompany loan and any new issuer intercompany loans are fullyrepaid;

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*then*,the term AA advances in respect of the issuer intercompany loan, the previousissuer intercompany loan and any new issuer intercompany loans, until each ofthose term AA advances is fully repaid;

*then*,the issuer term A advances in respect of the previous intercompany loans andany new intercompany loans, until all of those term A term advances are fullyrepaid; and

*finally*,the term BBB advances in respect of the issuer intercompany loan, the previousissuer intercompany loan and any new issuer intercompany loans, until each ofthose term BBB advances is fully repaid.

If a non-assettrigger event occurs, any series 4 class A issuer notes then outstanding willnot be repaid on their scheduled redemption dates.

**If theissuer security is enforced, any series 4 class A issuer notes then outstandingwill not be repaid on their scheduled redemption dates**

If the issuersecurity is enforced, then the mortgages trustee will distribute funds asrequired under the terms of the transaction agreements. In these circumstances,any series 4 class A issuer notes then outstanding will not be repaid on theirscheduled redemption dates and there is also a risk that those class A issuernotes may not be repaid by their final maturity dates.

**Loanssubject to further advances will be repurchased by the seller from themortgages trustee, which will affect the prepayment rate of the loans, and thismay affect the yield to maturity of the issuer notes**

If the servicer atits discretion decides to grant a borrower a further advance under a loan whichhas been assigned to the mortgages trustee, then the seller will be required torepurchase that loan under the relevant mortgage account and its relatedsecurity from the mortgages trustee save for any loan in arrears at a priceequal to the outstanding principal balance of those loans together with anyaccrued and unpaid interest and expenses to the date of purchase. The yield tomaturity of the issuer notes may be affected by the repurchase of loans subjectto further advances.

**Inlimited circumstances, loans subject to product switches will be repurchased bythe seller from the mortgages trustee, which will affect the prepayment rate ofthe loans, and this may affect the yield to maturity of the issuer notes**

Loans subject toproduct switches will not be repurchased unless on any distribution date, theseller is in breach of the conditions precedent to the sale of new loans to themortgages trustee. From and including that date to but excluding the date whenthose conditions precedent have been satisfied, the seller will be required torepurchase any loans and their related security that are subject to productswitches. The seller will be required to repurchase the relevant loan or loansunder the relevant mortgage account and their related security from themortgages trustee at a price equal to the outstanding principal balance ofthose loans together with any accrued and unpaid interest and expenses to thedate of purchase.

A loan will besubject to a product switch if the borrower and the seller agree on or theservicer offers a variation in the financial terms and conditions applicable tothe relevant borrower’s loan, other than:

·                  anyvariation agreed with a borrower to control or manage arrears on the loan;

·                  anyvariation to the interest rate as a result of a borrower being linked to HVR 2;

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·                  anyvariation in the maturity date of the loan unless, while the issuerintercompany loan is outstanding, it is extended beyond June 2040;

·                  anyvariation imposed by statute;

·                  anyvariation of the rate of interest payable in respect of the loan where thatrate is offered to the borrowers of more than 10 per cent. by outstandingprincipal amount of loans comprised in the trust property in any interestperiod; or

·                  anyvariation in the frequency with which the interest payable in respect of theloan is charged.

The yield tomaturity of the issuer notes may be affected by the repurchase of loans subjectto product switches.

**Ratingsassigned to the issuer notes may be lowered or withdrawn after the noteholderspurchase the issuer notes, which may lower the market value of the issuer notes**

The ratingsassigned to each class of the issuer notes address the likelihood of full andtimely payment to the noteholders of all payments of interest on each interestpayment date under those classes of the issuer notes. The ratings also addressthe likelihood of “ultimate” payment of principal on the finalmaturity date of each class of the issuer notes. Any ratingagency may lower its rating or withdraw its rating if, in the sole judgment ofthe rating agency, the credit quality of the issuer notes has declined or is inquestion. If any rating assigned to the issuer notes is lowered or withdrawn,the market value of the issuer notes may be reduced.

A change to theratings assigned to a class of issuer notes will not affect the ratingdesignation of each issuer term advance in the intercompany loans.

**Principalpayments on the original pass-through notes will be deferred in somecircumstances**

Principalrepayments on the issuer term AA advances and/or the issuer term BBB advanceswill be deferred in the following circumstances:

If on a Funding 1interest payment date;

·                  thereis a debit balance on the BBB principal deficiency sub-ledger, the A principaldeficiency sub-ledger or the AA principal deficiency sub-ledger afterapplication of the Funding 1 available revenue receipts on that Funding 1interest payment date; or any term BBB advances; or

·                  theadjusted general reserve fund level is less than the reserve fund threshold; or

·                  theaggregate outstanding principal balance of loans in the mortgages trust, inrespect to which the aggregate amount in arrears is more than three times themonthly payment then due, is more than 5 per cent. of the aggregate outstandingprincipal balance of loans in the mortgages trust;

then to the extent thatany term AAA advance remains outstanding (whether or not such term AAA advanceis then due and payable) after the allocation of principal on that Funding 1interest payment date to those term advances, the issuer term AA advances andissuer term BBB advances will not be entitled to principal repayments until therelevant circumstance as described above has been remedied or otherwise ceasesto exist. In addition, if any term AA advance remains outstanding (whether ornot 

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such term AA advance isthen due and payable) after the allocation of principal on that Funding 1interest payment date to those term advances, the issuer term BBB advances willnot be entitled to principal repayments until the relevant circumstance asdescribed above has been remedied or otherwise ceases to exist and if any termA advance remains outstanding (whether or not such term A advance is then dueand payable) after the allocation of principal on that Funding 1 interestpayment date to those term advances, the issuer term BBB advance will not beentitled to principal repayments until the relevant circumstances as describedabove have been remedied or otherwise cease to exist. This means that paymentsof principal on the class C issuer notes of all series and, as applicable, theclass B issuer notes of all series will be deferred until the earlier of thetime when the relevant circumstance described in this risk factor has beenremedied (if ever) and the final maturity date of the relevant notes.

Furthermore, if,on a Funding 1 interest payment date prior to the issuer step-up date:

·                  oneor more bullet term advances and/or scheduled amortization installments arethen in a cash accumulation period; and

·                  thequarterly CPR is less than 15 per cent.; and

·                  thereis a cash accumulation shortfall at that time;

then, on or before theirstep-up dates, the issuer term advances that are original pass-through termadvances will be entitled to principal repayments only to the extent permittedunder the pass-through repayment restrictions.

**Series 4 issuer notes and series 5 issuer notes may be subject to risk if the trustproperty deteriorates after repayment of previous series of the issuer notes**

If the loanscomprising the trust property do not perform as expected at any time after therepayment in full of the series 4 issuer notes and/or the series 5 issuer notesmay not be repaid in full.

**Noteholdersmay be subject to exchange rate risks on the series 4 issuer notes**

Repayments ofprincipal and payments of interest on the series 4 class A issuer notes will bemade in US dollars and on the series 4 class B issuer notes and series 4 classC issuer notes will be made in euro, but the issuer term advances made by theissuer to Funding 1 and repayments of principal and payments of interest byFunding 1 to the issuer under the issuer intercompany loan will be in sterling.

To hedge itscurrency exchange rate exposure, including the interest rate exposure connectedwith that currency exposure, the issuer has entered into the issuer dollarcurrency swaps for the series 4 class A issuer notes with the issuer dollarcurrency swap providers and the issuer euro currency swaps for the series 4class B issuer notes and the series 4 class C issuer notes with the issuer eurocurrency swap providers.

If the issuer failsto make timely payments of amounts due or certain other events occur inrelation to the issuer under an issuer swap and any applicable grace period hasexpired then the issuer will have defaulted under that issuer swap. If theissuer defaults under an issuer swap due to non-payment or otherwise, therelevant issuer swap provider will not be obliged to make further paymentsunder that issuer swap and may terminate that issuer swap. If an issuer swapprovider is not obliged to make payments, or if it exercises any right toterminate that it may have under the relevant issuer swap, or if it defaults inits obligations to make payments of amounts in US dollars or euro, asapplicable, equal to the full amount to be paid by it on the payment datesunder the relevant issuer swap (which are the same dates as the interestpayment dates in respect of the issuer notes), the issuer 

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will be exposed tochanges in US dollar / sterling or euro / sterling currency exchange rates andin the associated interest rates on these currencies. Unless a replacementissuer swap is entered into, the issuer may have insufficient funds to makepayments due on the issuer notes of any class and any series that are thenoutstanding.

Each issuer swapprovider will be obliged to gross up payments made by it to the issuer ifwithholding taxes are imposed on payments under the relevant issuer swap due toa change in law. However, if such a gross up is required, the relevant swapprovider may subject to obtaining the consent of the security trustee (which,if certain conditions are satisfied, will not be withheld), terminate therelevant issuer currency swap. If it does terminate the relevant issuercurrency swap, the issuer will be exposed to changes in currency exchange ratesand in the associated interest rates on these currencies. Unless a replacementissuer currency swap is entered into, the issuer may have insufficient funds tomake payments due on the issuer notes of any class and any series that are thenoutstanding.

**Themortgages trustee GIC provider or the Funding 1 GIC provider may cease tosatisfy certain criteria to provide the mortgages trustee GIC account or theFunding 1 GIC account**

The mortgagestrustee GIC provider and the Funding 1 GIC provider are required to satisfycertain criteria (including certain criteria and/or permissions set or requiredby the Financial Services Authority (the “FSA”) from time to time) in order tocontinue to receive deposits in the mortgages trustee GIC account and theFunding 1 GIC account respectively. If either the mortgages trustee GICprovider or the Funding 1 GIC provider ceases to satisfy those criteria thenthe relevant account may be transferred to another entity that does satisfythose criteria. In these circumstances the new GIC provider may not offer a GICon terms as favorable as those provided by the mortgages trustee GIC provideror the Funding 1 GIC provider.

The criteriareferred to above include a requirement that the short-term, unguaranteed andunsecured ratings of the mortgages trustee GIC provider or the Funding 1 GICprovider, as the case may be, are at least A-1+ by Standard &Poor’s, F1+ by Fitch and P-1 by Moody’s, unless each rating agencyconfirms that its then current rating of the notes would not be adverselyaffected as a result of such ratings falling below these minimum ratings.

**Terminationpayments on the issuer swaps may adversely affect the funds available to makepayments on the issuer notes**

If any of theissuer swaps terminate, the issuer may as a result be obliged to make atermination payment to the relevant issuer swap provider. The amount of thetermination payment will be based on the cost of entering into a replacementissuer swap. Under the issuer intercompany loan agreement, Funding 1 will berequired to pay the issuer an amount equal to any termination payment due bythe issuer to the relevant issuer swap provider. Funding 1 will also be obligedto pay the issuer any extra amounts that the issuer may be required to pay toenter into a replacement swap.

The issuer cannotgive noteholders any assurance that Funding 1 will have the funds available tomake that payment or that the issuer will have sufficient funds available tomake any termination payment under any of its issuer swaps or to makesubsequent payments to noteholders in respect of the relevant series andclass of the issuer notes. Nor can the issuer give noteholders any assurancethat it will be able to enter into a replacement issuer swap,or, if one is entered into, that the credit rating of thereplacement issuer swap provider will be sufficiently high to prevent adowngrading of the then current ratings of the issuer notes by the ratingagencies.

Except where therelevant issuer swap provider has caused the relevant issuer swap to terminateby its own default, any termination payment due by the issuer will rank equallynot only with payments due to the holders of the series and class of the issuernotes which rank equally with 

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the series and class ofissuer notes to which the relevant swap relates but also with payments due tothe holders of any other series and class of issuer notes to which the relevantswap relates. Any additional amounts required to be paid by the issuerfollowing termination of the relevant issuer swap (including any extra costsincurred (for example, from entering into “spot” currency or interest rateswaps) if the issuer cannot immediately enter into a replacement swap) willalso rank equally not only with payments due to the holders of the series andclass of the issuer notes to which the relevant issuer swap relates but alsowith payments due to the holder of any other series and class of the issuernotes which rank equally with the series and class of the issuer notes to whichthe relevant issuer swap relates. Furthermore, any termination payment oradditional payment or additional amounts required to be paid by the issuerfollowing termination of an issuer swap will rank ahead of payments due to theholders of any series and class of the issuer notes which ranks below the seriesand class of the issuer notes to which the relevant issuer swap relates.Therefore, if the issuer is obliged to make a termination payment to therelevant issuer swap provider or to pay any other additional amount as a resultof the termination of the relevant issuer swap, this may affect the funds whichthe issuer has available to make payments on the issuer notes of any class andany series.

**Risksassociated with the Funding 1 swap**

To provide a hedgeagainst (a) the mortgages trustee variable base rate payable on thevariable rate loans, the rates of interest payable on the tracker rate loansand the fixed rates of interest payable on the fixed rate loans; and (b) therate of interest payable by Funding 1 on the intercompany loans, Funding 1 hasentered into the Funding 1 swap agreement. If Funding 1 fails to make timelypayments under the Funding 1 swap, it will have defaulted under the Funding 1swap. The Funding 1 swap provider is obliged only to make payments under theFunding 1 swap if and for so long as Funding 1 makes payments under the same.If the Funding 1 swap provider is not obliged to make payments, or if itexercises any right to terminate that it may have under the Funding 1 swap, orif it defaults in its obligation to make payments under the Funding 1 swap,Funding 1 will be exposed to the variance between the rates of interest payableon the loans and the rate of interest payable by it under the intercompanyloans unless a replacement Funding 1 swap is entered into. If the Funding 1 swapterminates, Funding 1 may as a result be obliged to make a termination paymentto the Funding 1 swap provider. Any variance between the rates of interestpayable on the loans and the rate of interest payable by Funding 1 under theintercompany loans and any termination payment payable by it to the Funding 1swap provider may adversely affect the ability of Funding 1 to meet itsobligations under the issuer intercompany loan agreement.

Funding 1 willreceive interest receipts on the loans on one basis but will pay amounts underthe Funding 1 swap on another basis, thereby exposing it to some basis risk. Onthe one hand Funding 1 will receive interest on the variable rate loans basedon HVR 1 (which is the variable mortgage rate set by the seller applicableto certain loans beneficially owned by the seller on the seller’s residentialmortgage book), HVR 2 (which is the second variable base rate that wasmade available to borrowers between 1 March 2001 and 1 February 2002)or the Halifax flexible variable rate (which is the variable rate applicable toflexible loans). On the other hand the payment obligations of Funding 1 underthe Funding 1 swap will, among other things, be based on the average of thestandard variable mortgage rates or their equivalent charged to existingborrowers on residential mortgage loans as published from time to time, afterexcluding the highest and the lowest rate, of Abbey National plc, HSBC Bankplc, Cheltenham & Gloucester plc, National Westminster Bank Plc,Nationwide Building Society, Northern Rock plc and Woolwich plc (and wherethose banks have more than one standard variable rate, the highest of thoserates). While it is anticipated that the average rate will broadly track bothHVR 1, HVR 2 and the Halifax flexible variable rate, the variance between theaverage rate and HVR 1, HVR 2 and the Halifax flexible variable rate,respectively, may affect the ability of Funding 1 to meet its paymentobligations under the Funding 1 swap agreement.

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**Theissuer relies on third parties to perform services in relation to the issuernotes, and the noteholders may be adversely affected if they fail to performtheir obligations**

The issuer is aparty to contracts with a number of other third parties that have agreed toperform services in relation to the issuer notes. For example, the issuer swapproviders have agreed to provide their respective issuer swaps, the corporateservices provider has agreed to provide corporate services and the payingagents and the agent bank have agreed to provide payment and calculationservices in connection with the issuer notes. In the event that any of theseparties were to fail to perform their obligations under the respectiveagreements to which they are a party, the noteholders may be adverselyaffected.

**The issuermay be unable to pay, in full or at all, interest due on the issuer notes ifthere is an income or principal deficiency**

If, on any Funding1 interest payment date, revenue receipts available to Funding 1 (including thereserve fund) are insufficient to enable Funding 1 to pay interest on theissuer term advances and any new term advances and other expenses of Funding 1ranking higher in seniority to interest due on these term advances, thenFunding 1 may use principal receipts on the loans received by it in themortgages trust to make up the shortfall.

Funding 1 will useprincipal receipts that would have been applied to repay the term advances withthe lowest rating designation to pay interest on those other term advances andsenior expenses described in the preceding paragraph where there is a shortfallof monies to pay those amounts. At the closing date, the relevant term advanceswith the lowest rating designation include the issuer term BBB advances. IfFunding 1 uses principal to repay interest and senior expenses in this manner,there will be less principal available to repay the issuer term BBB advancesand the corresponding classes of issuer notes.

Funding 1 will beobliged to keep a ledger that records any principal applied to pay interest andsenior expenses (as well as any losses on the loans causing a principaldeficiency). When the amount recorded on the ledger is equal to the principalamount outstanding of the term BBB advances, then Funding 1 will use principalreceipts that would have been applied to repay the term advance with the nextlowest rating designation to pay interest on the term advances and seniorexpenses where there is a shortfall of money to pay those amounts. When theamount recorded on the principal deficiency ledger exceeds the principal amountoutstanding on the term A advances, Funding 1 will use principal receipts thatwould have been applied to repay the term AA advances to pay those amounts.When the amount recorded on the principal deficiency ledger exceeds the principalamount outstanding on the term AA advances, Funding 1 will use principalreceipts that would have been applied to repay the term AAA advances to paythose amounts.

During the term ofthe transaction, however, it is expected that any principal deficiencies willbe recouped from subsequent excess revenue receipts and amounts standing to thecredit of the reserve fund. The revenue receipts and the reserve fund monieswill be applied first to cover any principal deficiency in respect of the termadvances with the highest rating designation and then the term advances withthe next highest rating designation and so on down to the term advances withthe lowest rating designation.

If there areinsufficient funds available because of income or principal deficiencies, thenone or more of the following consequences may occur:

·                  theinterest and other net income of Funding 1 may not be sufficient, after makingthe payments to be made in priority, to pay, in full or at all, interest due onthe issuer term BBB advances and the issuer term AA advances;

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·                  theremay be insufficient funds to repay the principal due and payable on any of theissuer term BBB advances and the issuer term AA advances prior to their finalrepayment dates unless the other net income of Funding 1 is sufficient, aftermaking other prior ranking payments, to reduce any principal deficiency inrespect of the term BBB advances, term A advances and term AA advances;

·                  ifthe amount of principal deficiencies exceeds the principal amount outstandingof any of the term advances (and the principal deficiencies cannot be coveredby the other income of Funding 1), then the issuer may not receive the fullprincipal amount of any or all of the issuer term advances and, accordingly,the noteholders may not receive the full face value of the class C issuernotes, the class B issuer notes and the class A issuer notes, as the case maybe; and/or

·                  theissuer may be unable to pay, in full or at all, interest due on the issuernotes.

**Theseller share of the trust property does not provide credit enhancement for theissuer notes**

Any losses fromloans included in the trust property will be allocated to Funding 1 and theseller proportionally on each distribution date in accordance with the Funding1 share percentage and the seller share percentage of the trust property. Theseller’s share of the trust property therefore does not provide creditenhancement for the Funding 1 share of the trust property or the issuer notes.Losses on the loans in the portfolio are allocated proportionately between theseller and Funding 1 depending on their respective shares in the trustproperty.

**Theissuer will only have recourse to the seller if there is a breach of warrantyby the seller, but otherwise the seller’s assets will not be available to theissuer as a source of funds to make payments on the issuer notes**

After an issuerintercompany loan acceleration notice under the issuer intercompany loan isgiven, the security trustee may, but shall not be obliged to, sell the Funding1 share of the trust property. There is no assurance that a buyer would befound or that a sale would realize enough money to repay amounts due andpayable under the issuer intercompany loan agreement.

The issuer,Funding 1 and the mortgages trustee will not have any recourse to the seller ofthe loans, other than in respect of a breach of warranty under the mortgagesale agreement.

The issuer,Funding 1, the mortgages trustee and the security trustee will not undertakeany investigations, searches or other actions on any loan or its relatedsecurity and each of them will rely instead on the warranties given in themortgage sale agreement by the seller.

If any of thewarranties made by the seller (a) in the case of each loan in theportfolio, was materially untrue on the date the loan was assigned to themortgages trustee or (b) in the case of each new loan, is materiallyuntrue on the date the new loan is assigned to the mortgages trustee, then theseller will be required to remedy the breach.

If the sellerfails to remedy the breach then the seller will be required to repurchase theloan or loans under the relevant mortgage account and their related security attheir outstanding principal balance as of the date of repurchase together withany arrears of interest and accrued and unpaid interest and expenses. There canbe no assurance that the seller will have the financial resources to repurchasethe loan or loans under the relevant mortgage account and their relatedsecurity. However, if the seller does not repurchase those loans and theirrelated security when required, then the seller’s share of the trust propertywill be deemed to be reduced by an amount equal to the principal amount 

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outstanding of thoseloans together with any arrears of interest and accrued and unpaid interest andexpenses.

Other than asdescribed here, neither the noteholders nor the issuer will have any recourseto the assets of the seller.

**There canbe no assurance that a borrower will repay principal at the end of the term onan interest-only loan, which may adversely affect repayments on the issuernotes**

Each loan in theportfolio is repayable either on a principal repayment basis or aninterest-only basis. Of the loans in the portfolio as at January 1, 2006,approximately 31.97 per cent. were interest-only loans. For interest-onlyloans, because the principal is repaid in a lump sum at the maturity of theloan, the borrower is recommended to have some repayment mechanism such as aninvestment plan in place which is intended to provide sufficient funds to repaythe principal at the end of the term. However, the seller does not ensure thata repayment mechanism is in place in all cases and does not take security overthese repayment mechanisms. The borrower is also recommended to take out a lifeinsurance policy in relation to the loan but, as with repayment mechanisms, theseller does not take security over these life insurance policies.

The ability of aborrower to repay the principal on an interest-only loan at maturity depends onthe borrower’s responsibility to ensure that sufficient funds are availablefrom an investment plan or another source, such as ISAs, pension policies,personal equity plans or endowment policies, as well as the financial conditionof the borrower, tax laws and general economic conditions at the time.

There can be noassurance that the borrower will have the funds required to repay the principalat the end of the term. If a borrower cannot repay the loan and a loss occurson the loan, then this may affect repayments of principal on the issuer notesif that loss cannot be cured by amounts standing to the credit of the reservefund or the application of excess Funding 1 available revenue receipts.

**There maybe risks associated with the fact that the mortgages trustee has no legal titleto the loans and their related security, which may adversely affect payments onthe issuer notes**

The sale by theseller to the mortgages trustee of the English mortgages will take effect inequity only. The sale by the seller to the mortgages trustee of the Scottishmortgages has been given effect by a Scottish declaration of trust by theseller (and any sale of Scottish mortgages in the future will be given effectby further Scottish declarations of trust) by which the beneficial interest inthe Scottish mortgages has been or will be transferred to the mortgagestrustee. In each case this means that legal title to the loans in the trustproperty remains with the seller, but the mortgages trustee has all the otherrights and benefits relating to ownership of each loan and its relatedsecurity (which rights and benefits are subject to the trust in favor of thebeneficiaries). The mortgages trustee has the right to demand that the sellergive it legal title to the loans and the related security in certaincircumstances and until then the mortgages trustee will not give notice of thesale of the English mortgages to any borrower or apply to the Land Registry orthe Central Land Charges Registry to register or record its equitable interestin the English mortgages or take any steps to complete or perfect its title tothe Scottish mortgages.

Because themortgages trustee has not obtained legal title to the loans or their relatedsecurity, there are risks, as follows:

·                  first,if the seller wrongly sold a loan which has already been assigned to themortgages trustee to another person, and that person acted in good faith anddid not have notice of the interests of the mortgages trustee or thebeneficiaries in the loan, then she or he might obtain good title to the loan,free from the interests of the mortgages trustee and the beneficiaries. If thisoccurred then the mortgages trustee would not have good title to the 

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affected loan and its related security and it wouldnot be entitled to payments by a borrower in respect of that loan. This mayaffect the ability of the issuer to repay the issuer notes; and

·                  second,the rights of the mortgages trustee and the beneficiaries may be subject to therights of the borrowers against the seller, such as the rights of set-off whichoccur in relation to transactions or deposits made between some borrowers andthe seller and the rights of borrowers to redeem their mortgages by repayingthe loan directly to the seller. If these rights were exercised, the mortgages trusteemay receive less money than anticipated from the loans, which may affect theability of the issuer to repay the issuer notes.

However, if aborrower exercises any set-off rights, then an amount equal to the amount setoff will reduce the total amount of the seller share of the trust propertyonly, and the minimum seller share has been sized in an amount expected tocover this risk, although there is no assurance that it will. If the minimumseller share is exhausted, then the amount of any set-offs would be applied toreduce the Funding 1 share of the trust property.

**Independentset-off risks which a borrower has against the seller may adversely affect thefunds available to the issuer to repay the issuer notes**

Once notice hasbeen given to borrowers of the transfer of the loans and their related securityto the mortgages trustee, independent set-off rights which a borrower hasagainst the seller will crystallize (such as, for example, set-off rightsassociated with borrowers holding deposits with the seller) and further rightsof independent set-off would cease to accrue from that date and no new rightsof independent set-off could be asserted following that notice. Set-off rightsarising under transaction set-off (which are set-off claims arising out of atransaction connected with the loan) will not be affected by that notice. Theseset-off rights if exercised could reduce the loan receipts available to themortgages trustee to distribute to Funding 1, and could ultimately affect theamounts available to the issuer for payments on the issuer notes.

**Set-offrisks in relation to flexible loans and delayed cashbacks may adversely affectthe funds available to the issuer to repay the issuer notes**

The seller hasmade, and in the future may make, an equitable assignment of the relevant loansand their related security, or in the case of Scottish loans a transfer of thebeneficial interest in the relevant loans and their related security, withlegal title being retained by the seller. Therefore, the rights of themortgages trustee may be subject to the direct rights of the borrowers againstthe seller, including rights of set-off existing prior to notification to theborrowers of the sale of the mortgages. The mortgages trust includes flexibleloans and delayed cashbacks. Set-off rights (including analogous rights inScotland) may occur if the seller fails to advance to a borrower a drawing orpermit the borrower to make an underpayment or to take a payment holiday undera flexible loan when the borrower is entitled to draw additional amounts ormake an underpayment or take a payment holiday under a flexible loan or if theseller fails to pay to a borrower any delayed cashback which the seller hadagreed to pay to that borrower after completion of the relevant loan.

If the sellerfails to advance the drawing or permit the borrower to make an underpayment ortake a payment holiday or pay the delayed cashback, then the relevant borrowermay set off any damages claim (or exercise analogous rights in Scotland)arising from the seller’s breach of contract against the seller’s (and, asassignee or holder of the beneficial interest in the loans and their relatedsecurity, the mortgages trustee’s) claim for payment of principal and/orinterest under the loan as and when it becomes due. These set-off claims willconstitute transaction set-off as described in the immediately preceding riskfactor.

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The amount of theclaim in respect of a drawing will, in many cases, be the cost to theborrower of finding an alternative source of finance although, in the caseof flexible loans or delayed cashbacks which are Scottish, it is possible thatthe borrower’s right of set-off could extend to the full amount of the relevantdrawing: the borrower may obtain a loan elsewhere, in which case the damageswould be equal to any difference in the borrowing costs together withany consequential losses, namely the associated costs of obtainingalternative funds (for example, legal fees and survey fees). If the borrower isunable to obtain an alternative loan, he or she may have a claim in respect ofother losses arising from the seller’s breach of contract where there arespecial circumstances communicated by the borrower to the seller at the timethe mortgage was taken out or which otherwise were reasonably foreseeable. Ineither case, the damages claim will be limited by general legal principlesconcerning remoteness of loss and mitigation. These include (i) theprinciple that something, which is a real possibility but would only occur in asmall minority of cases, will not usually fall within the contractual measureof damages, and (ii) the borrower’s duty to mitigate his loss.

In respect of adelayed cashback, underpayment or payment holiday, the claim is likely to be inan amount equal to the amount due under the delayed cashback together withinterest and expenses and consequential losses (if any).

A borrower mayalso attempt to set off against his or her mortgage payments an amount greaterthan the amount of his or her damages claim (or exercise analogous rights inScotland). In that case, the servicer will be entitled to take enforcementproceedings against the borrower although the period of non-payment by theborrower is likely to continue until a judgment is obtained.

The exercise ofset-off rights by borrowers would reduce the incoming cashflow to the mortgagestrustee during the exercise. However, the amounts set off will be applied toreduce the seller share of the trust property only.

 Further there may be circumstances in whichcertain drawings may rank behind security created by a borrower after the dateupon which the borrower entered into its mortgage with the seller.

The minimum sellershare has been sized in an amount expected to cover this risk, although thereis no assurance that it will. If the minimum seller share is not sufficient inthis respect then there is a risk that noteholders may not receive all amountsdue on the issuer notes or that payments may not be made when due.

**If theservicer is removed, there is no guarantee that a substitute servicer would befound, which could delay collection of payments on the loans and ultimatelycould adversely affect payments on the issuer notes**

The seller hasbeen appointed by the mortgages trustee and the beneficiaries as servicer toservice the loans. If the servicer breaches the terms of the servicingagreement, then the mortgages trustee, Funding 1 and/or the security trusteewill be entitled to terminate the appointment of the servicer and appoint a newservicer in its place.

There can be noassurance that a substitute servicer with sufficient experience ofadministering mortgages of residential properties would be found who would bewilling and able to service the loans on the terms of the servicing agreement.In addition, as described below, any substitute servicer will be required to beauthorized under FSMA (as defined below) in order to administer loans thatconstitute regulated mortgage contracts. The ability of a substitute servicerfully to perform the required services would depend, among other things, on theinformation, software and records available at the time of the appointment. Anydelay or inability to appoint a substitute servicer may affect payments on theloans and hence the issuer’s ability to make payments when due on the issuernotes.

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The noteholdersshould note that the servicer has no obligation itself to advance payments thatborrowers fail to make in a timely fashion.

**Funding1 may not receive the benefit of any claims made on the buildings insurancewhich could adversely affect payments on the issuer notes**

No assurance canbe given that Funding 1 will always receive the benefit of any claims madeunder any applicable insurance contracts. This could reduce the principalreceipts received by Funding 1 according to the Funding 1 share percentage andcould adversely affect the issuer’s ability to redeem the issuer notes. Thenoteholders should note that buildings insurance is renewed annually.

**Ifthe issuer’s interpretation of certain technical rules under the ConsumerCredit Act (the “CCA”) were held to be incorrect by a court or the Ombudsman orwas challenged by a significant number of borrowers, or borrowers exerciserights of set-off insofar as available under the CCA, there could be materialdisruption in the income from the mortgages trust**

In the UnitedKingdom, the Office of Fair Trading (the “OFT”) is responsible for the issue oflicenses under, and the superintendence of the working and the enforcement ofthe CCA, related consumer credit regulations and other consumer protectionlegislation. The OFT may review businesses and operations, provide guidelinesto follow and take actions when necessary with regard to the mortgage market inthe United Kingdom.

Currently, acredit agreement is regulated by the CCA where: (a) the borrower is orincludes an individual; (b) the amount of “credit” as defined in the CCAdoes not exceed the financial limit, which is £25,000 for credit agreementsmade on or after May 1, 1998, or lower amounts for credit agreements madebefore that date; and (c) the credit agreement is not an exempt agreementunder the CCA (for example, in certain circumstances, a credit agreement tofinance the purchase of land is an exempt agreement under the CCA).

Any creditagreement that is wholly or partly regulated by the CCA or to be treated assuch has to comply with requirements under the CCA as to licensing of lendersand brokers, documentation and procedures of credit agreements, and (in so faras will be applicable) pre-contract disclosure. If it does not comply withthose requirements, then to the extent that the credit agreement is regulatedby the CCA or to be treated as such, it is unenforceable against the borrower: (a) withoutan order of the OFT, if the lender or any broker does not hold the requiredlicense at the relevant time; (b) totally, if the form to be signed by theborrower is not signed by the borrower personally or omits or mis-states a ‘‘prescribedterm’’; or (c) without a court order in other cases and, in exercising itsdiscretion whether to make the order, the court would take into account anyprejudice suffered by the borrower and any culpability of the lender.

Any creditagreement intended to be a regulated mortgage contract under the FinancialServices and Markets Act 2000 (the “FSMA”) (as described below) or unregulatedmight instead be wholly or partly regulated by the CCA or treated as suchbecause of technical rules on: (a) determining whether any creditunder the CCA arises, or whether the financial limit of the CCA is exceeded; (b) determiningwhether the credit agreement is an exempt agreement under the CCA; and (c) changesto credit agreements.

A court orderunder section 126 of the CCA is necessary to enforce a land mortgage securing acredit agreement to the extent that the credit agreement is regulated by theCCA or to be treated as such. In dealing with such application, the court hasthe power, if it appears just to do so, to amend the credit agreement or toimpose conditions upon its performance or to make a time order (for example,giving extra time for arrears to be cleared).

Under section 75of the CCA in certain circumstances: (a) the lender is liable to theborrower in relation to misrepresentation and breach of contract by a supplierin a transaction financed by the 

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lender, where the relatedcredit agreement is or is treated as entered into under pre-existingarrangements, or in contemplation of future arrangements, between the lenderand the supplier; and (b) the lender has an indemnity from the supplieragainst such liability, subject to any agreement between the lender and thesupplier.

The borrower mayset off the amount of the claim against the lender against the amount owing bythe borrower under a loan or under any other loan that the borrower has taken. Anysuch set-off may adversely affect the issuer’s ability to make payments on theissuer notes.

**In December 2003, the DTIpublished a White Paper proposing amendments to the CCA and to secondarylegislation made under it.**

In June 2004,secondary legislation was made on: (a) amending requirements as todocumentation of credit agreements, coming into force on May 31, 2005, or August 31,2005 for agreements given to the borrower for signature but not made before May 31,2005; (b) pre-contract disclosure, coming into force on May 31, 2005;and (c) replacing the formula for calculating the maximum amount payableon early settlement with a formula more favorable to the borrower, coming intoforce on May 31, 2005 for new agreements or on May 31, 2007 or May 31,2010 (depending on the term of the agreement) for agreements existing before May 31,2005.

In December 2004,the UK Parliament published a consumer Credit Bill proposing to amend the CCAby, among other things: (a) removing the financial limit for consumerlending and (b) repealing the rule that, to the extent that a creditagreement is regulated by the CCA or treated as such, it may be unenforceabletotally. Once these changes come into force, then any credit agreement made orchanged such that a new contract is entered into after this time, other than anexempt agreement under the CCA, will be regulated by the CCA. Such credit agreementwill have to comply with requirements as described above and, if it does notcomply, it will be unenforceable without an order of the OFT or without a courtorder as described above.

This consumer Credit Billalso proposed to amend the CCA by: (a) strengthening the licensing regime;(b) changing the grounds for challenging a credit agreement from “extortionatecredit bargain” to “unfair relationship” between the lender and the borrower,with retrospective effect on existing arrangements (and expressly imposingliability to repay the borrower on both the originator and any assignee, suchas the mortgages trustee); and (c) extending the jurisdiction of theOmbudsman (as described below) to license holders under the CCA. The ConsumerCredit Bill was enacted as the Consumer Credit Act 2006 on 30th March 2006.The resulting amendments to the CCA will come into force on such days as theSecretary of State for Trade and Industry may appoint. Further proposals toamend the CCA and secondary legislation made under it are expected at anunspecified time.

The seller hasinterpreted certain technical rules under the CCA in a way common withmany other lenders in the mortgage market. If such an interpretation were heldto be incorrect by a court or the Ombudsman, then a credit agreement, to theextent that it is regulated by the CCA or treated as such, would beunenforceable as described above. If such interpretation were challenged by asignificant number of borrowers, then this could lead to significant disruptionand shortfall in income of the mortgages trustee. Court decisions have beenmade on technical rules under the CCA against certain mortgage lenders,but such decisions are very few and are generally county court decisions notbinding on other courts.

**Failureby the seller or any servicer to hold relevant authorizations and permissionsunder FSMA in relation to regulated mortgage contracts may have an adverseeffect on enforceability of mortgage contracts**

In the UnitedKingdom, regulation of residential mortgage business by the FSA under theFinancial Services and Markets Act 2000 (the “FSMA”) came into force on October 31,2004, the date 

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known as “N(M)”.****Entering into, arranging, advising on andadministering regulated mortgage contracts, and agreeing to do any of thesethings,****are (subject to applicableexemptions) regulated activities under the FSMA.

A credit agreementis a regulated mortgage contract under the FSMA if, at the time it is enteredinto on or after N(M): (a) the borrower is an individual or trustee; (b) thecontract provides for the obligation of the borrower to repay to be secured bya first legal mortgage or, in Scotland, a first ranking standard security onland (other than timeshare accommodation) in the UK; and (c) at least 40per cent. of that land is used, or is intended to be used, as or in connectionwith a dwelling by the borrower or (in case of credit provided to trustees) byan individual who is a beneficiary of the trust, or by a related person.

The main effectsare that, on or after N(M), unless an exclusion or exemption applies: (a) eachentity carrying on a regulated mortgage activity by way of business has to holdauthorization and permission from the FSA to carry on that activity; and (b) generally,each financial promotion in respect of an agreement relating to a qualifyingcredit has to be issued or approved by a person holding authorization andpermission from the FSA. If requirements as to authorization and permission oflenders and brokers or as to issue and approval of financial promotions are notcomplied with, a regulated mortgage contract will be unenforceable against theborrower except with the approval of a court. An unauthorized person whoadministers a regulated mortgage contract entered into on or after N(M) maycommit a criminal offence, but this will not render the contract unenforceableagainst the borrower.

Any creditagreement intended to be a regulated mortgage contract under the FSMA mightinstead be wholly or partly regulated by the CCA or treated as such, orunregulated, and any credit agreement intended to be unregulated might insteadbe a regulated mortgage contract under the FSMA, because of technical rules on:(a) determining whether the credit agreement falls within the definitionof “regulated mortgage contract”; and (b) changes to credit agreements.

The seller isrequired to hold, and holds authorization and permission to enter into and toadminister and, where applicable, to advise on regulated mortgage contracts.Subject to any exemption, brokers will be required to hold authorization andpermission to arrange and, where applicable, to advise on regulated mortgagecontracts.

The issuer andmortgages trustee are not and do not propose to be authorized persons under theFSMA. The issuer and mortgages trustee will not require authorization in orderto acquire legal or beneficial title to a regulated mortgage contract. Theissuer and mortgages trustee do not carry on the regulated activity ofadministering (servicing) mortgage contracts, because the loans are servicedpursuant to the servicing agreement by the servicer, which has the required FSAauthorization and permission. If the servicing agreement terminates, however,the issuer and mortgages trustee will have a period of not more than one monthin which to arrange for mortgage servicing to be carried out by a replacementservicer having the required FSA authorization and permission. In addition,from N(M) no variation has been or will be made to the loans, and nofurther advance or product switch has been or will be made in relation to aloan, where it will result in the issuer, Funding 1, Funding 2 or the mortgagestrustee arranging, or advising in respect of, administering (servicing) orentering into a regulated mortgage contract or agreeing to carry on any ofthese activities, if the issuer Funding 1, Funding 2 or the mortgages trusteewould be required to be authorized under the FSMA to do so.

**If a significant number of borrowers attempt to setoff claims for damage based on contravention of an FSA rule against theamount owing by the borrower under a loan, there could be a material decreasein receipts to the issuer from the mortgages trust**

The FSA Mortgages:Conduct of Business Sourcebook (“MCOB”), which sets out its rules forregulated mortgage activities, came into force on October 31, 2004. These rules cover,inter alia, certain pre-origination matters, such as financial promotion andpre-application illustrations, pre-

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contract and start ofcontract and post-contract disclosure, contract changes, charges and arrearsand repossessions. FSA rules for prudential and authorization requirementsfor mortgage firms and insurance intermediaries, and for extending theappointed representatives regime came into force on October 31, 2004 formortgages and on January 14, 2005 for general insurance.

A borrower who isa private person is entitled to claim damages for loss suffered as a result ofany contravention by an authorized person of an FSA rule, and may set-off theamount of the claim against the amount owing by the borrower under a loan orany other loan that the borrower has taken (or exercise analogous rights inScotland). Any such set-off may adversely affect the issuer’s ability to makepayments on the issuer notes.

So as to avoiddual regulation it is intended that regulated mortgage contracts will not beregulated by the CCA, and relevant regulations under FSMA are designed toclarify the position in this regard. This exemption only affects creditagreements made on or after N(M), and credit agreements made before N(M) butsubsequently changed such that a new contract is entered into on or after N(M) andconstitutes a regulated mortgage contract. A court order under section 126 ofthe CCA is, however, necessary to enforce a land mortgage securing a regulatedmortgage contract that would, apart from this exemption, be regulated by theCCA or be treated as such.

No assurance canbe given that additional regulations from the OFT, the FSA or any otherregulatory authority will not arise with regard to the mortgage market in theUnited Kingdom generally, the seller’s particular sector in that market orspecifically in relation to the seller. Any such action or developments orcompliance costs may have a material adverse effect on the seller, the issuer,the servicer, the mortgages trustee, Funding 1, Funding 2 and their respectivebusinesses and operations. This may adversely affect our ability to makepayments in full on the issuer notes when due.

The seller hasgiven or, as applicable, will give warranties to the mortgages trustee in themortgage sale agreement that, among other things, each loan and its relatedsecurity is enforceable (subject to certain exceptions). If a loan or itsrelated security does not comply with these warranties, and if the defaultcannot be or is not cured within 20 London business days, then the seller willbe required to repurchase the loans under the relevant mortgage account andtheir related security from the mortgages trustee.

Prior to N(M), in theUnited Kingdom, self-regulation of mortgage business existed under the MortgageCode (the “CML Code”) issued by the Council of Mortgage Lenders (the “CML”).Halifax subscribed to the CML Code and on and from N(M), as an authorizedperson, has been subject to the FSA requirements in MCOB. Membership of the CMLand compliance with the CML Code were voluntary. The CML Code sets out minimumstandards of good mortgage business practice, from marketing to lendingprocedures and dealing with borrowers experiencing financial difficulties. SinceApril 30, 1998 lender-subscribers to the CML Code may not accept mortgagebusiness introduced by intermediaries who were not registered with (before November 1,2000 until October 31, 2004) the Mortgage Code Register of Intermediariesor (on and after November 1, 2000 until October 31, 2004) theMortgage Code Compliance Board. Complaints relating to breach of the CML Codewere dealt with by the relevant scheme, such as the Banking Ombudsman Scheme orthe Mortgage Code Arbitration Scheme.

**Anew European Commission directive concerning consumer credit may, if adoptedand implemented, have an adverse effect on enforceability of the loans**

In September 2002,the European Commission published a proposal for a directive of the EuropeanParliament and of the Council on consumer credit.

In its originalform the proposal applied to certain mortgage loan products. In July 2005,the European Commission published a Green Paper on mortgage credit in which itannounced its 

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intention that loanssecured by a land mortgage would be excluded from the proposed directive onconsumer credit, but will be addressed by the Green Paper process.

In October 2005,the European Commission published a further amended proposal for a directive onconsumer credit, which applies to loans not exceeding €50,000 (subject tocertain exceptions) but does not apply to loans secured by a land mortgage. Theproposed directive, which may be further substantially amended before it isbrought into effect, is unlikely to be adopted before mid-2006 and memberstates will then have a further two years in which to bring nationalimplementing legislation into force.

Until the finaltext of the directive is decided and the details of the United Kingdomimplementing legislation are published, it is not certain what effect theadoption and implementation of the directive would have on the seller, theissuer, the servicer, the mortgages trustee, Funding 1, Funding 2 and theirrespective businesses and operations. This may adversely affect the issuer’sability to make payments in full on the issuer notes when due.

**Undernew distance marketing regulations, some of the loans may be cancellable, whichmay have an adverse effect on the Issuer’s ability to make payments on theissuer notes**

The FinancialServices (Distance Marketing) Regulations 2004 apply to, among other things,credit agreements entered into on or after 31 October 2004 by means ofdistance communication (i.e. without any substantive simultaneous physicalpresence of the originator and the borrower). A regulated mortgage contractunder the FSMA, if originated by a UK lender from an establishment in theUnited Kingdom, will not be cancellable under these regulations. Certain othercredit agreements will be cancellable under these regulations if the borrowerdoes not receive prescribed information at the prescribed time. Where thecredit agreement is cancellable under these regulations, the borrower may sendnotice of cancellation at any time before the end of the fourteenth day afterthe day on which the cancellable agreement is made, where all the prescribedinformation has been received, or, if later, the borrower receives the last ofthe prescribed information.

If the borrower cancels the credit agreement underthese regulations, then:

(a)                                  the borrower is liable to repay the principal and anyother sums paid by the originator to the borrower under or in relation to thecancelled agreement, within 30 days beginning with the day of the borrowersending notice of cancellation or, if later, the originator receiving notice ofcancellation;

(b)                                 the borrower is liable to pay interest, or any early repayment charge orother charge for credit under the cancelled agreement, only if the borrowerreceived certain prescribed information at the prescribed time and if otherconditions are met; and

(c)                                  any security provided in relation to the contract is to be treated asnever having had effect.

If a significant portion of the loans in the mortgagestrust are characterised as being cancellable under these regulations, thenthere could be an adverse effect on the issuer’s receipts in respect of theloans, affecting the issuer’s ability to make payments on the issuer notes.

**Regulationsin the United Kingdom could lead to some terms of the loans beingunenforceable, which may adversely affect payments on the issuer notes**

In the UnitedKingdom, the Unfair Terms in Consumer Contracts Regulations 1999 as amended(the “1999 Regulations”), which, together with (in so far as applicable) theUnfair Terms in Consumer Contracts Regulations 1994 (together with the 1999Regulations, the “UTCCR”), apply to agreements made on or after July 1,1995 and affect all or almost all of the loans, provide that:

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·                  aconsumer may challenge a standard term in an agreement on the basis that it is “unfair”within the UTCCR and therefore not binding on the consumer; and

·                  theOFT and any “qualifying body” within the UTCCR (such as the FSA) may seek toenjoin (or in Scotland interdict) a business from relying on unfair terms.

The UTCCR will notgenerally affect “core terms” which define the main subject matter of thecontract, such as the borrower’s obligation to repay the principal, but mayaffect terms that are not considered to be core terms, such as the lender’spower to vary the interest rate.

For example, if aterm permitting the lender to vary the interest rate (as the seller ispermitted to do) is found to be unfair, the borrower would not be liable to payinterest at the increased rate or, to the extent that the borrower has paid it,would be able, as against the lender, or any assignee such as the mortgagestrustee, to claim repayment of the extra interest amounts paid or to set-offthe amount of the claim against the amount owing by the borrower under the loanor any other loan that the borrower has taken. Any such non-recovery, claim orset-off may adversely affect the issuer’s ability to make payments on theissuer notes.

In February 2000,the OFT issued a guidance note on what the OFT considers to be fair terms andunfair terms for interest variation in mortgage contracts. Where the interestvariation term does not provide for precise and immediate tracking of anexternal rate outside the lender’s control, and if the borrower is locked in,for example by an early repayment charge that is considered to be a penalty,the term is likely to be regarded as unfair under the UTCCR unless the lender (i) notifiesthe affected borrower in writing at least 30 days before the rate change and (ii) permitsthe affected borrower to repay the whole loan during the next three monthsafter the rate change, without paying the early repayment charge. The sellerhas reviewed the guidance note and has concluded that its compliance with itwill have no material adverse effect on the loans or its business. The guidancenote has been withdrawn from the OFT website and is currently under review bythe OFT and FSA, but may remain in effect as the OFT’s view and as a factorthat the FSA may take into account.

The FSA has agreedwith the OFT to take responsibility for the enforcement of the UTCCR inmortgage agreements. In May 2005, the FSA issued a statement of goodpractice on fairness of terms in consumer contracts which is relevant to firmsauthorised and regulated by the FSA in relation to products and services withinthe FSA’s regulatory scope. The statement provides that for locked-inborrowers, a lender may consider drafting the contract to permit a change inthe contract be made only where any lock-in clause is not exercised.

In August 2002,the Law Commission for England and Wales and the Scottish Law Commission issueda joint consultation LCCP No. 166/SLCDP 119 on proposals to rationalizethe UK’s Unfair Contract Terms Act 1977 and the 1999 Regulations into a singlepiece of legislation and a final report, together with a bill on unfair terms,was published in February 2005. It is not proposed that there should beany significant increase in the extent of controls over terms in consumercontracts. Some changes are proposed, however, such as that (a) a consumermay also challenge a negotiated term in agreement on the basis that it is “unfair”and “unreasonable” within the legislation and therefore not binding on theconsumer; and (b) in any challenge by a consumer (but not by the OFT or aqualifying body) of a standard term or a negotiated term, the burden of prooflies on the business to show that the term is fair and reasonable.

No assurance canbe given that changes enacted in the 1999 Regulations, or any changes adoptedin guidance on interest variation terms, will not have a material adverseeffect on the seller, the issuer, the servicer, the mortgages trustee, Funding1, Funding 2 and their respective businesses and operations. This may adverselyaffect the issuer’s ability to make payments in full on the issuer notes whendue.

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**Implementationof the Unfair Commercial Practices Directive**

In May 2005,the European Parliament and the Council adopted a directive on unfairbusiness-to-consumer commercial practices (the “Unfair Practices Directive”).Generally, this directive applies full harmonisation, which means that memberstates may not impose more stringent provisions in the fields to which fullharmonisation applies. By way of exception, this directive permits memberstates to impose more stringent provisions in the fields of financial servicesand immovable property, such as mortgage loans.

The UnfairPractices Directive provides that enforcement bodies may take administrativeaction or legal proceedings against a commercial practice on the basis that itis “unfair” within the directive. This directive is intended to protect onlycollective interests of consumers, and so is not intended to give any claim,defence or right of set-off to an individual consumer.

InDecember 2005, the DTI published a consultation paper on implementing theUnfair Practices Directive and amending existing consumer legislation. TheDirective must be transposed into UK law by June 12, 2007, and those lawsmust come into force in December 2007 in the UK and other member states.The implementing legislation will be subject to a transitional period until June 12,2013 for applying full harmonisation in the fields to which it applies. It istoo early to predict what effect the implementation of the Unfair PracticesDirective would have on the loans.

**Decisionsof the Ombudsman could lead to some terms of the loans being varied, which mayadversely affect payments on the issuer notes**

Under FSMA, theFinancial Ombudsman Service is required to make decisions on, among otherthings, complaints relating to activities and transactions under itsjurisdiction on the basis of what, in the Ombudsman’s opinion, would be fairand reasonable in all circumstances of the case, taking into account, amongother things, law and guidance. Transitional provisions exist pursuant to whichcertain complaints relating to breach of the CML Code occurring before N(M) maybe dealt with by the Financial Ombudsman Service. Complaints brought before theFinancial Ombudsman Service for consideration must be decided on a case-by-casebasis, with reference to the particular facts of any individual case. Each casewould first be adjudicated by an adjudicator. Either party to the case mayappeal against the adjudication. In the event of an appeal, the case proceedsto a final decision by the Ombudsman.

In January 2002,the Ombudsman made a determination on the seller’s appeal to an earlierdecision by an adjudicator at the Financial Ombudsman Service concerning a caseinvolving HVR 1 and HVR 2. In March 2001, two joint borrowers with acapped rate loan originated when Halifax offered only a single standardvariable base rate contacted Halifax and requested that their loan be linked toHVR 2. Halifax informed the borrowers that, because they were still in theirproduct period, they could either transfer to HVR 2 when their product periodexpired or transfer to HVR 2 immediately and pay the applicable early repaymentfee. The borrowers complained to the Financial Ombudsman Service and, on January 29,2002, on appeal by Halifax, the Ombudsman determined in the borrowers’ favorand recommended that Halifax recalculate the borrowers’ mortgage by referenceto HVR 2 from the date when the seller should have granted their request in March 2001,refund any overpayments and pay £150 for any inconvenience caused. HVR 2 waswithdrawn and ceased to be available to new borrowers with effect from February 1,2002.

The Ombudsman’sdecision only applies to the two borrowers and their particular circumstances,though other borrowers may also complain to the Ombudsman. In March 2002,the seller announced that borrowers under loans who were in similarcircumstances and who had asked to be transferred to HVR 2 when it wasavailable would be invited to make a product switch to HVR 2 and to obtain arefund for all overpayments of interest since the date they had asked to betransferred. For each of those loans, the borrowers would also receive £150 forany inconvenience caused. The borrowers under loans who requested to betransferred after HVR 2 was withdrawn and before the 

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announcement in March 2002were not offered a switch or a refund, though the seller has given or will giveeach of these customers an ex gratia payment of £100.

Since then,further decisions by the Ombudsman in similar cases have confirmed thataffected borrowers were only entitled to a refund of overpayments of interestfrom the date when they asked to be transferred to HVR 2 and not from the datewhen HVR 2 first became available, and also that affected borrowers were notentitled to apply to be transferred to HVR 2 after it was withdrawn.

The seller doesnot believe that any Ombudsman’s decision to date or any other decision by anycompetent authority in the future (in respect of the seller’s two variable baserates, HVR 1 and HVR 2) would affect the yield on the loans in such a way as tohave a material adverse effect on our ability to meet our obligations on theissuer notes.

As regards otherborrowers, in the event that a decision (in respect of the seller’s variablebase rate) by the Ombudsman or any other competent authority finds that aborrower’s loan should be linked to HVR 2, then that borrower may set-off theoverpaid sum against the amount owing under his or her loan if the seller doesnot reimburse that borrower. Any such non-recovery, claim or set-off ultimatelymay adversely affect the issuer’s ability to make payments on the issuer notes.

As the FinancialOmbudsman Service is required to make decisions on the basis of, among otherthings, the principles of fairness, it is not possible to predict how anyfuture decision of the Financial Ombudsman Service would affect the ability ofthe issuer to repay the issuer notes.

**Taxpayable by Funding 1 or the issuer may adversely affect the issuer’s ability tomake payments on the issuer notes**

Funding 1 and theissuer will generally be subject to UK corporation tax, currently at a rate of30 per cent., on the profit reflected in their respective profit and lossaccounts as increased by the amount of any non-deductible expenses or losses.If the tax payable by Funding 1 or the issuer is greater than expected because,for example, non-deductible expenses or losses are greater than expected, thefunds available to make payments on the noteholders’ issuer notes will bereduced and this may adversely affect the issuer’s ability to make payments onthe issuer notes.

The UK corporationtax position of the issuer and Funding 1, however, also depends to asignificant extent on the accounting treatment applicable to it. From January 1,2005, the accounts of the issuer are required to comply with new UK FinancialReporting Standards reflecting International Financial Reporting Standards (newUK GAAP) or may be required to comply with International Financial ReportingStandards (“IFRS”) where the issuer chooses to adopt IFRS. Funding 1 may alsochoose to comply with new UK GAAP or IFRS. There is concern that companies suchas the issuer and Funding 1 might, under either IFRS or new UK GAAP, suffertiming differences that could result in profits or losses for accounting purposes,and accordingly for tax purposes (unless tax legislation provides otherwise),which bear little or no relationship to the company’s cash position. However,the Finance Act 2005 requires “securitisation companies” to prepare taxcomputations for accounting periods beginning on or after January 1, 2005and ending before January 1, 2007 on the basis of UK GAAP as applicable upto December 31, 2004, notwithstanding the requirement to prepare statutoryaccounts under IFRS or new UK GAAP. The UK Government has announced, in thePre-Budget Report on December 5, 2005, that the interim regime is to beextended for a further year to December 31, 2007. The issuer and Funding 1will each be a “securitisation company” for these purposes.

The stated policyof H.M. Revenue & Customs is that the tax neutrality of securitisationspecial purpose companies in general should not be disrupted as a result of thetransition to IFRS or new UK GAAP and that they are working with participantsin the securitisation industry to identify appropriate means of preventing anysuch disruption. The Finance Act 2005 enables regulations to be made toestablish such a regime. However, if measures are not introduced by H.M.Revenue & Customs to deal with the corporation tax position of suchcompanies in respect of accounting periods 

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ending on or after December 31,2007, then profits or losses could arise in the issuer and/or Funding 1 as aresult of the application of IFRS or new UK GAAP which could have tax effectsnot contemplated in the cashflows for the transaction and as such adverselyaffect the issuer and/or Funding 1 and therefore payments on the issuer notes.

**Risksrelated to alternative characterisation of the issuer notes as an equityinterest in the issuer for US federal income tax purposes**

The issuer is aspecial purpose company and will be passive. Under current US federal incometax law, the issuer is treated as an association that is taxable as acorporation for US federal income tax purposes. The characterization of theissuer notes as debt or equity for US federal income tax purposes depends onmany factors, including the form of such notes, the terms of the issuer notesand the debt-to-equity ratio of the issuer. Because the issuer may not havesubstantial equity, there is a risk that the United States Internal RevenueService (“IRS”) could assert that the lowest subordinated class of notes or anyother class of notes should be treated as an equity interest in the issuerrather than as debt for US federal income tax purposes. The issuer intends totreat the issuer notes as debt of the issuer for all purposes, including for USfederal income tax purposes.

**Noteholders’interests may be adversely affected by a change of law in relation towithholding tax**

In the event thatamounts due under the issuer notes are subject to withholding tax, the issuerwill not be obliged to pay additional amounts in relation thereto. The issuermay, in certain circumstances, redeem the issuer notes.

**Noteholders’interests may be adversely affected if the United Kingdom joins the EuropeanMonetary Union**

If the UnitedKingdom joins the European Monetary Union prior to the maturity of the issuernotes, investors cannot be assured that this would not adversely affectpayments on their issuer notes.

It is possiblethat prior to the maturity of the issuer notes the United Kingdom may become aparticipating member state in the European economic and monetary union and thatthe euro may become the lawful currency of the United Kingdom. In that event, (a) allamounts payable in respect of any issuer notes denominated in sterling maybecome payable in euro; (b) applicable provisions of law may allow orrequire the issuer to re-denominate such issuer notes into euro and takeadditional measures in respect of such issuer notes; and (c) theintroduction of the euro as the lawful currency of the United Kingdom mayresult in the disappearance of published or displayed rates for deposits inpounds sterling used to determine the rates of interest on such issuer notes orchanges in the way those rates are calculated, quoted and published ordisplayed. The introduction of the euro could also be accompanied by a volatileinterest rate environment, which could adversely affect a borrower’s ability torepay its loan as well as adversely affect investors. It cannot be said withcertainty what effect, if any, adoption of the euro by the United Kingdom willhave on investors in the issuer notes.

**Changesof law may adversely affect noteholders’ interests**

The structure ofthe issue of the issuer notes and the ratings which are assigned to them arebased on English law and (in relation to the Scottish loans) Scots law ineffect as at the date of the prospectus. The issuer cannot provide assurance asto the impact of any possible change to English or Scots law or administrativepractice in the United Kingdom after the date of this Form 20-F.

*InsolvencyAct 2000*. Significant changes to the UK insolvency regimehave been enacted in recent years, including the Insolvency Act 2000. The InsolvencyAct 2000 allows certain “small” companies to seek protection from theircreditors for a period of 28 days, for the purposes of putting together acompany voluntary arrangement, with the option for creditors to extend themoratorium for 

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a further two months. A “small”company is defined as one which satisfies, in any financial year, two or moreof the following criteria: (i) its turnover is not more than £5.6 million,(ii) its balance sheet total is not more than £2.8 million and (iii) thenumber of employees is not more than 50. Whether or not a company is a “small”company may change from period to period and consequently no assurance can begiven that the issuer, the mortgages trustee or Funding 1 will not, at anygiven time, be determined to be a “small” company. The Secretary of State forTrade and Industry may by regulation modify the eligibility requirements for “small”companies and can make different provisions for different cases. No assurancecan be given that any such modification or different provisions will not bedetrimental to the interests of the noteholders.

Secondarylegislation has now been enacted which excludes certain special purposecompanies in relation to capital markets transactions from the optionalmoratorium provisions. Such exceptions include (amongst other matters) (i) acompany which is a party to an agreement which is or forms part of a capitalmarket arrangement (as defined in the secondary legislation) under which (a) aparty has incurred or when the agreement was entered into was expected to incura debt of at least £10 million under the arrangement and (b) thearrangement involves the issue of a capital markets investment (also defined,but generally, a rated, listed or traded bond) and (ii) a company which atthe date of filing for a moratorium has incurred a liability (including apresent, future or contingent liability) of at least £10 million. While theissuer, the mortgages trustee and Funding 1 should fall within the exceptions,there is no guidance as to how the legislation will be interpreted and theSecretary of State for Trade and Industry may by regulation modify theexception. No assurance may be given that any modification of the eligibilityrequirements for “small” companies and/or the exceptions will not bedetrimental to the interests of the noteholders.

If the issuerand/or the mortgages trustee and/or Funding 1 is determined to be a “small”company and determined not to fall within one of the exceptions (by reason ofmodification of the exceptions or otherwise), then the enforcement of theissuer security by the security trustee may, for a period, be prohibited by theimposition of a moratorium.

*EnterpriseAct 2002*. On September 15, 2003, the corporateinsolvency provisions of the Enterprise Act 2002 came into force, amendingcertain provisions of the Insolvency Act 1986 (as amended, the “Insolvency Act”).These provisions introduced significant reforms to corporate insolvency law. Inparticular the reforms restrict the right of the holder of a floating chargecreated after September 15, 2003 to appoint an administrative receiver(unless an exception applies) and instead gives primacy to collectiveinsolvency procedures (in particular, administration).

The holder of afloating charge created before September 15, 2003 over the whole orsubstantially the whole of the assets of a company (such as the securitytrustee under the Funding 1 deed of charge) retains the ability to block theappointment of an administrator by appointing an administrative receiver, whowill primarily act in the interests of the floating charge holder.

The Insolvency Actcontains provisions that continue to allow for the appointment of anadministrative receiver in relation to certain transactions in the capitalmarkets. The relevant exception provides that the right to appoint anadministrative receiver is retained for certain types of security (such as theissuer security) that form part of a capital markets arrangement (as defined inthe Insolvency Act) that involves indebtedness of at least £50 million (or,when the relevant security document was entered into (being in respect of thetransactions described in the prospectus, relating to the issuer notes and theissued deed of charge), a party to the relevant transaction (such as the issuer)was expected to incur a debt of at least £50 million) and the issue of acapital markets investment (also defined, but generally a rated, listed ortraded bond). The Secretary of State for Trade and Industry may, by secondarylegislation, modify the capital market exception and/or provide that theexception shall cease to have effect. No assurance can be given that any suchmodification or provision in respect of the capital market exception, or itsceasing to be applicable to the transactions described in this document willnot adversely affect payments on the issuer notes. In addition, as the 

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provisions of theEnterprise Act have never been considered judicially, no assurance can be givenas to whether the Enterprise Act could have a detrimental effect on theinterests of the noteholders.

The Insolvency Actalso contains a new out-of-court route into administration for a qualifyingfloating charge holder, the directors or the company itself. The relevantprovisions provide for a notice period during which the holder of the floatingcharge can either agree to the administrator proposed by the directors of thecompany or appoint an alternative administrator, although the moratorium willtake effect immediately after notice is given. If the qualifying floatingcharge holder does not respond to the directors’ notice of intention toappoint, the directors’, or as the case may be, the company’s appointee willautomatically take office after the notice period has elapsed. Where the holderof a qualifying floating charge within the context of a capital markettransaction retains the power to appoint an administrative receiver, suchholder may prevent the appointment of an administrator (either by the newout-of-court route or by the court based procedure), by appointing anadministrative receiver prior to the appointment of the administrator beingcompleted.

The newadministration provisions of the Insolvency Act give primary emphasis to therescue of the company as a going concern. The purpose of realizing property tomake a distribution to one or more secured creditors is subordinated to theprimary purposes of rescuing the company as a going concern or achieving abetter result for the creditors as a whole than would be likely if the companywere wound up. No assurances can be given that the primary purposes of the newprovisions will not conflict with the interests of noteholders were the issuerever subject to administration.

In addition to theintroduction of a prohibition on the appointment of an administrative receiveras set out above, section 176A of the Insolvency Act provides that in relationto floating charges created after September 15, 2003 any receiver(including an administrative receiver), liquidator or administrator of acompany is required to make a “prescribed part” of the company’s “net property”available for the satisfaction of unsecured debts in priority to the claims ofthe floating charge holder. The company’s “net property” is defined as theamount of the chargor’s property which would be available for satisfaction ofdebts due to the holder(s) of any debentures secured by a floating chargeand so refers to any floating charge realizations less any amounts payable tothe preferential creditors or in respect of the expenses of the liquidation oradministration. The “prescribed part” is defined in The Insolvency Act 1986(Prescribed Part) Order 2003 (SI 2003/2097) to be an amount equal to 50 percent. of the first £10,000 of floating charge realizations plus 20 per cent. ofthe floating charge realizations thereafter, provided that such amount may notexceed £600,000.

This obligationdoes not apply if the net property is less than a prescribed minimum and therelevant officeholder is of the view that the cost of making a distribution tounsecured creditors would be disproportionate to the benefits. The relevantofficeholder may also apply to court for an order that the provisions ofsection 176A of the Insolvency Act should not apply on the basis that the costof making a distribution would be disproportionate to the benefits.

Floating chargerealizations upon the enforcement of the issuer security and the securitycreated by the second supplemental Funding 1 deed of charge may be reduced bythe operation of these “ring fencing” provisions.

**Thenoteholders will not receive issuer notes in physical form, which may causedelays in distributions and hamper the noteholders’ ability to pledge or resellthe issuer notes**

Unless the globalissuer notes are exchanged for definitive issuer notes, which will only occurunder a limited set of circumstances, the noteholders’ beneficial ownership ofthe issuer notes will only be recorded in book-entry form with The DepositoryTrust Company (“DTC”), Euroclear or Clearstream, Luxembourg. The lack of issuernotes in physical form could, among other things:

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·                  resultin payment delays on the issuer notes because the issuer will be sendingdistributions on the issuer notes to DTC, Euroclear or Clearstream, Luxembourginstead of directly to the noteholders;

·                  makeit difficult for the noteholders to pledge the issuer notes if issuer notes inphysical form are required by the party demanding the pledge; and

·                  hinderthe noteholders’ ability to resell the issuer notes because some investors maybe unwilling to buy issuer notes that are not in physical form.

**Ifthe noteholders have a claim against the issuer it may be necessary for thenoteholders to bring suit against the issuer in England to enforce thenoteholders’ rights**

The issuer hasagreed to submit to the non-exclusive jurisdiction of the courts of England,and it may be necessary for noteholders to bring a suit in England to enforcetheir rights against the issuer.

**Implementationof the Basel II risk-weighted asset framework may result in changes to therisk-weighting of the issuer notes**

The BaselCommittee on Banking Supervision published the text of the new framework on June 26,2004 under the title “Basel II: International Convergence of CapitalMeasurement and Capital Standards: a Revised Framework”. This new framework(the “Basel II Framework”), which places enhanced emphasis on market disciplineand sensitivity to risk, is the basis for national rule-making and approvalprocesses to continue and for banking organizations to complete theirpreparations for implementation of the Basel II Framework. The Committee hassuggested that the various approaches under the Basel II Framework will beimplemented in stages, some from year-end 2006, the most advanced at year-end2007. National implementation dates may differ depending on the relevantimplementation process. As and when implemented (including in respect of EUfinancial institutional investors, through the proposed EU Capital RequirementsDirective), the Basel II Framework could affect the risk-weighting of theissuer notes in respect of certain investors if those investors are subject tothe Basel II Framework following its implementation. Consequently, investorsshould consult their own advisers as to the consequences to and effect on themof the proposed implementation of the Basel II Framework. No predictions can bemade as to the precise effects of potential changes which might result upon theimplementation of the Basel II Framework.

The issuer may,under certain circumstances relating to the statutory implementation of theBasel II Framework in the United Kingdom, require investors to sell theirissuer notes or redeem their issuer notes.

**Item 4. Information on theCompany**

A.            * History and Development of the Company*

Not applicable.

B.            *BusinessOverview*

Not applicable.

C.            *OrganizationalStructure*

Not applicable.

D.            *Property,Plants and Equipment*

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The issuer

The property ofthe issuer consists primarily of its right to receive payments of interest andprincipal from Funding 1 on the various term advances made under the issuerintercompany loan agreement.

Funding 1

The property ofFunding 1 consists primarily of its interest in the trust property held by themortgages trustee (which entitles Funding 1 to receive certain payments ofprincipal and interest from the trust property according to the terms of themortgages trust deed) and amounts available under a reserve fund.

The mortgagestrustee

The trust propertyincludes the initial portfolio of loans and their related security assigned tothe mortgages trustee by the seller on June 14, 2002, and on severalsubsequent dates, including March 6, 2003, any new loans and their newrelated security assigned to the mortgages trustee by the seller after theclosing date, any increase in the outstanding principal balance of a loan dueto the borrower taking payment holidays or making underpayments under a loan ora borrower making a drawing under any flexible loan, any interest, principaland other amounts (excluding third party amounts) paid by borrowers on their loansand their related security, the rights under the insurance policies that areassigned to the mortgages trustee or of which the mortgages trustee has thebenefit, and amounts on deposit and interest earned on the mortgages trusteeguaranteed investment contract. Any actual losses in relation to the loans, anyactual reductions occurring in respect of the loans and distributions ofprincipal made from time to time to the beneficiaries or the mortgages trustwill be deducted from the trust property. The composition of the trust propertywill fluctuate as drawings under flexible loans and new loans are added, asborrowers take payment holidays or make underpayments under a loan and as theloans that were previously part of the trust property are repaid, mature,default or are repurchased by the seller.

**Item 5. Operating and FinancialReview and Prospects**

A.*            Operating Results*

Not applicable.

B. *           Liquidity and CapitalResources*

Not applicable.

C. *           Research andDevelopment, Patents and Licenses, etc.*

Not applicable.

D*.            Trend Information*

Not applicable.

E. *            Off-balance SheetArrangements*

Not applicable.

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F. *            Tabular Disclosure ofContractual Obligations*

Not applicable.

G*.            Safe Harbor*

Not applicable.

**Item 6. Directors, SeniorManagement and Employees**

A. *           Directors and SeniorManagement*

The following setsout the names, business addresses and business occupations of the directors ofthe issuer, Funding 1 and the mortgages trustee. Because each of the issuer,Funding 1 and the mortgages trustee is organized as a special purpose companyand will be largely passive, it is expected that the directors of each entityin that capacity will manage its operations to the extent necessary.

The issuer
| Name                                | ** ** | **Business Address**                                              | ** ** | **Business Occupation**                             |
|-------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------|
| SFM Directors  Limited              |       | 35 Great St. Helen’s  London  EC3A 6AP                       |       | Provision of directors to special purpose companies |
|                                |       |                                                              |       |                                                |
| SFM Directors  (No. 2) Limited |       | 35 Great St. Helen’s  London  EC3A 6AP                       |       | Provision of directors to special purpose companies |
|                                |       |                                                              |       |                                                |
| David Balai                         |       | HBOS Treasury Services plc  33 Old Broad Street   London EC2N 1HZ |       | Director                                            |

 

                Funding 1
| Name                                | ** ** | **Business Address**                                             | ** ** | **Business Occupation**                             |
|-------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------|
| SFM Directors  Limited              |       | 35 Great St. Helen’s  London  EC3A 6AP                      |       | Provision of directors to special purpose companies |
|                                |       |                                                             |       |                                                |
| SFM Directors  (No. 2) Limited |       | 35 Great St. Helen’s  London  EC3A 6AP                      |       | Provision of directors to special purpose companies |
|                                |       |                                                             |       |                                                |
| David Balai                         |       | HBOS Treasury Services plc  33 Old Broad Street  London EC2N 1HZ |       | Director                                            |

 

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The mortgagestrustee
| Name                  | ** ** | **Business Address**                                             | ** ** | **Business Occupation** |
|-----------------------|------------|------------------------------------------------------------------|------------|-------------------------|
| Michael George Best   |       | 47 Esplanade  St. Helier  Jersey JE1 0BD                         |       | Trust Company Director  |
|                  |       |                                                             |       |                    |
| Peter John Richardson |       | 47 Esplanade  St. Helier  Jersey JE1 0BD                         |       | Trust Company Director  |
|                  |       |                                                             |       |                    |
| David Balai           |       | HBOS Treasury Services plc  33 Old Broad Street  London EC2N 1HZ |       | Director                |

 

David Balai is anemployee of a company in the same group of companies as the seller.

B.*           Compensation*

The issuer

In accordance withthe issuer corporate services agreement entered into between the issuer, theseller, the security trustee, the note trustee, Holdings and Structured FinanceManagement Limited (“SFM”), the seller and SFM will each provide directors andother corporate services for the issuer in consideration for a payment of aseparate fee payable by the issuer to SFM. No other remuneration is paid to anydirector or officer in connection with such director’s or officer’s activitieson behalf of the issuer.

Funding 1

In accordance withthe Funding 1 corporate services agreement entered into between Funding 1, theseller, the security trustee, the note trustee, Holdings, Permanent PECOHLimited, SFM, and SFM Corporate Services Limited (“SFM Corporate”), the sellerand SFM will each provide directors and SFM will provide other corporateservices for Funding 1 in consideration for a payment of a separate fee payableby Funding 1 to SFM. No other remuneration is paid to any director or officerin connection with such director’s or officer’s activities on behalf of Funding1.

The mortgagestrustee

In accordance withthe mortgages trustee corporate services agreement entered into between themortgages trustee, the security trustee, the note trustee and SFM OffshoreLimited (“SFM Offshore”), the seller and SFM Offshore will each providedirectors and SFM Offshore will provide other corporate services for themortgages trustee in consideration for a payment of a separate fee payable bythe mortgages trustee to SFM Offshore. No other remuneration is paid to anydirector or officer in connection with such director’s or officer’s activitieson behalf of the mortgages trustee.

C.            *Board Practices*

Not applicable.

D.            *Employees*

None of theissuer, Funding 1 or the mortgages trustee has any employees.

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E.             *Share Ownership*

Not applicable.

**Item 7. Major Shareholders andRelated Party Transactions**

A.            *Major Shareholders*

The issuer andFunding 1 are wholly owned by Permanent Holdings Limited, a companyincorporated under the laws of England and Wales. SFM Corporate holds all ofthe beneficial interest in the issued shares of Holdings on a discretionarytrust for the benefit of The National Society for the Prevention of Cruelty toChildren in the United Kingdom and for other charitable purposes.

SFM Offshore holdsall of the issued shares of the mortgages trustee in trust for charitablepurposes.

Neither SFMCorporate nor SFM Offshore is affiliated with Halifax plc.

B.            *Related Party Transactions*

None, other thanwith respect to the making of payments in respect to the securities asdescribed in the Registration Statement and “Item 3.D — Risk Factors”.

C.            *Interests of Experts andCounsel*

Not applicable toannual reports filed on Form 20-F.

**Item 8. Financial Information**

For a discussionof the available financial information, see “Item 3.A — Selected FinancialInformation”.

The issuer,Funding 1 and the mortgages trustee know of no material legal or arbitrationproceedings involving their respective companies that may have significanteffects on the registrants’ financial position or profitability, includinggovernmental proceedings pending or known to be contemplated and any materialproceeding in which any director or affiliate is either a party adverse to aregistrant or has a material interest adverse to a registrant.

**Item 9. The Offer and Listing**

A.*           Offer and ListingDetails*

Not applicable.

B. *           Plan of Distribution*

Not applicable toannual reports filed on Form 20-F.

C. *           Markets*

The principaltrading market for each class of the issuer notes is the London Stock Exchange.The issuer notes have been listed on the London Stock Exchange since March 6,2003.

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D. *           Selling Shareholders*

Not applicable toannual reports filed on Form 20-F.

E. *            Dilution*

Not applicable toannual reports filed on Form 20-F.

F. *            Expenses of the Issue*

Not applicable toannual reports filed on Form 20-F.

**Item 10. Additional Information**

A. *           Share Capital*

Not applicable toannual reports filed on Form 20-F.

B. *           Memorandum and Articlesof Association*

The memorandum andarticles of association for each of the issuer, Funding 1 and the mortgagestrustee are incorporated by reference from the Registration Statement. Pleasealso see the description of the issuer, Funding 1 and the mortgages trustee setforth in the Registration Statement.

C.            *Material Contracts*

Not applicableother than with respect to contracts relating to the issuer notes, which weredescribed in the Registration Statement.

D. *           Exchange Controls*

None.

E. *            Taxation*

**UnitedKingdom Taxation**

The followingsection is a general description of certain UK tax consequences of thepurchase, ownership and disposition of the issuer notes based on current lawand practice in the UK.

In relation toFunding, the summary assumes that Funding does not draw up its accounts inaccordance with UK GAAP reflecting International Financial Reporting Standards(**IFRS**) and that the profit in Funding 1’sprofit and loss account will not exceed 0.01 per cent. of the Funding 1available revenue receipts.

The Issuer shouldbe regarded as a “securitisation company” for the purposes of section 83 of theFinance Act 2005. On the assumption that the Finance (No.2) Bill 2006 isenacted in its current form, the issuer will prepare its corporation taxreturns, for accounting periods ending before 1 January 2008, on the basisof UK GAAP as applicable up to 31 December 2004 (**OLD UK GAAP**),notwithstanding that the issuer’s actual accounts will be drawn up inaccordance with conformed UK GAAP reflecting IFRS or, if the issuer so elects,IFRS. Consequently, in relation to the issuer, the summary assumes that theprofit which would be reflected in the issuer’s profit and loss account, wereit to be drawn up in accordance with Old UK GAAP, will not exceed 0.01 percent. of the interest on the issuer term advances under the issuer intercompanyloan and any interest earned by the issuer on its share capital proceeds.

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The summaryfurther assumes that all payments made pursuant to the final documentation arecalculated on arm’s length terms. The summary does not purport to be a completeanalysis of all tax considerations of the purchase, ownership and dispositionof the issuer notes. It relates to the position of persons who are the absolutebeneficial owners of issuer notes and may not apply to certain classes ofpersons such as dealers or persons connected with the issuer. Noteholders whomay be subject to tax in a jurisdiction other than the UK or who may be unsureas to their tax position should seek their own professional advice.

**Taxationof US residents**

As discussed inmore detail below, no UK withholding tax will be required in relation tointerest payments on the issuer notes provided that the issuer notes are listedon a “recognised stock exchange”, which includes the London Stock Exchange. Ifthe issuer notes cease to be listed on a “recognised stock exchange”, an amountmust be withheld on account of UK income tax at the lower rate (currently 20per cent.), subject to any direction to the contrary from H.M. Revenue andCustoms (**HMRC**) in respect of such relief as maybe available pursuant to the provisions of an applicable double taxationtreaty.

Residents of theUS are generally not subject to tax in the UK on payments on the issuer notesunder the terms of the double taxation treaty between the US and the UK (the **Treaty**), subject to completion of administrativeformalities, except where the issuer notes are effectively connected with apermanent establishment or a fixed base of the noteholder situated in the UK orwhere the amounts paid on the issuer notes exceed the return on comparable debtinstruments, in which event the UK may tax the excess in accordance with UKdomestic law.

Subject to theopinions set out in the preceding paragraphs, as discussed in more detail under“-Direct assessment of non-UK residentholders of the issuer notes to UK tax on interest” below, a noteholder who isresident in the US for US tax purposes and who is not resident in the UK for UKtax purposes will not be subject to UK tax in respect of any payments on theissuer notes unless they are held by or for a trade, profession or vocationcarried on by him through a branch or agency (or, in the case of a noteholderthat is a company, through a permanent establishment) in the UK.

US resident noteholders will not be liable to UK tax in respect of adisposal of the issuer notes provided they are not within the charge to UKcorporation tax and (i) are not resident or ordinarily resident in the UK,and (ii) do not carry on a trade, profession or vocation through a branchor agency in connection with which interest is received or to which the issuernotes are attributable.

On the basis of the assumptions above, Funding 1 and the issuer willgenerally be subject to UK corporation tax, currently at a rate of 30 per cent,on the profit reflected in their respective applicable profit and loss accountsas increased by the amounts of any non-deductible expenses or losses.

The mortgages trustee will have no liability to UK tax in relation toamounts which it receives on behalf of Funding 1 or the seller under themortgages trust.

**Withholdingtax**

There will be noUK withholding tax in relation to interest payments on the issuer notesprovided that, so far as concerns deduction by the issuer or its paying agents,the issuer notes are listed on a “recognised stock exchange”, as defined insection 841 of the Income and Corporation Taxes Act 1988 (the **Taxes Act**). The London Stock Exchange is currently arecognised stock exchange for this purpose. Under HMRC practice, securitieswill be listed on the London Stock Exchange if they are admitted to theOfficial List by the UK Listing Authority and admitted to trading on the LondonStock Exchange. If the issuer notes cease to be listed on a “recognised stockexchange”, an amount must generally be withheld on account of UK income tax atthe lower rate 

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(currently 20 per cent.)from interest paid on them, subject to any direction to the contrary by HMRC inrespect of such relief as may be available pursuant to the provisions of anapplicable double taxation treaty or to the interest being paid to persons(including companies within the charge to UK corporation tax) and incircumstances specified in section 349A to 349D of the Taxes Act.

Noteholders who areindividuals may wish to note that HMRC has power to obtain information(including the name and address of the beneficial owner of the interest) fromany person in the UK who either pays interest to, or receives interest for thebenefit of, an individual. Information so obtained may, in certaincircumstances, be exchanged by HMRC with the tax authorities of otherjurisdictions.

**Directassessment of non-UK resident holders of the issuer notes to UK tax on interest**

Interest on theissuer notes has a UK source. Accordingly, payments of interest on the issuernotes will in principle be within the charge to UK tax even if paid withoutwithholding or deduction. However, other than where the provisions of theTreaty apply to allow certain interest paid to residents of the US to be taxedin the UK, such payments will not be chargeable to UK tax in the hands of anoteholder (other than certain trustees) who is not resident for tax purposesin the UK unless such noteholder carries on a trade, profession or vocationthrough a branch or agency (or, in the case of a noteholder which is a companywhich carries on a trade through a permanent establishment) in the UK inconnection with which the payments are received or to which the issuer notesare attributable, in which case (subject to exemptions for interest received bycertain categories of agent such as some brokers and investment managers) taxmay be levied on the UK branch or agency or permanent establishment. Theprovisions of an applicable double taxation treaty may also be relevant in suchcircumstances.

**Taxationof returns: companies within the charge to UK corporation tax**

In general, noteholders who are within the charge to UK corporation tax(other than authorized unit trusts) will normally be subject to tax on allprofits and gains, including interest and profit and gains attributable tocurrency fluctuations, arising on or in connection with the issuernotes under the loan relationship rules. Any such profits and gains willgenerally fall to be calculated in accordance with the statutory accountingtreatment of the issuer notes in the hands of the relevant noteholder. Reliefmay be available in respect of losses or for related expenses on a similarbasis.

**Taxationof returns: other noteholders**

Noteholders who are not within the charge to UK corporation tax and whoare resident or ordinarily resident in the UK for tax purposes or who carry ona trade, profession or vocation in the UK through a branch or agency inconnection with which interest on the issuer notes is received or to which theissuer notes are attributable will generally be liable to UK tax on the amountof any interest received in respect of the issuer notes.

A disposal of issuer notes which are not regarded by HMRC asconstituting “qualifying corporate bonds” (**QCBs**) withinthe meaning of section 117 of the Taxation of Chargeable Gains Act 1992 (**TCGA**) may give rise to a chargeable gain or an allowableloss for the purpose of the UK taxation of chargeable gains.

A disposal of issuer notes which are regarded byHMRC as constituting QCBs within the meaning of section 117 of the TCGA are notexpected to give rise to a chargeable gain or an allowable loss for thepurpose of the UK taxation of chargeable gains.

A disposal of the issuer notes by such noteholders as described abovemay also give rise to a charge to tax on income in respect of an amountrepresenting interest accrued on the issuer 

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notessince the preceding payment date. For the issuer notes which constitutevariable rate securities, taxation in respect of such a disposal will becomputed on the basis that such amount as HMRC considers to be just andreasonable will be treated as accrued income. However, the transferee of avariable rate security will not be entitled to any relief on such amount.

**Stampduty and stamp duty reserve tax**

No UK stamp dutyor stamp duty reserve tax is payable on the issue or transfer of the offeredglobal issuer notes or on the issue or transfer of definitive issuer notes.

**UKtaxation of Funding 1 and the issuer**

On the basis ofthe assumptions above, Funding 1 and the issuer will generally be subject to UKcorporation tax, currently at a rate of 30 per cent., on the profitreflected in the respective applicable profit and loss accounts as increased bythe amounts of any non-deductible expenses or losses. In respect of Funding 1,the profit in the profit and loss account will not exceed 0.01 per cent.of the Funding 1 available revenue receipts. In respect of the issuer, theprofit in the profit and loss account drawn up in accordance with Old UK GAAPwill not exceed 0.01 per cent. of the interest on the issuer term advancesunder the issuer intercompany loan and any interest earned by the issuer on itsShare Capital proceeds.

**UKtaxation of the mortgages trustee**

The mortgagestrustee will have no liability to UK tax in respect of any income, profit orgain arising under these arrangements. Accordingly, the mortgages trustee willhave no liability to UK tax in relation to amounts that it receives on behalfof Funding 1 or the seller under the mortgages trust.

**EUSavings Tax Directive**

Under the EuropeanCouncil Directive 2003/48/EC on the taxation of savings income, each MemberState of the European Union is required, from 1July 2005, to provide to the taxauthorities of another Member State details of payments of interest (or similarincome) paid by a person within its jurisdiction to an individual resident inthat other Member State. However, for a transitional period, Belgium,Luxembourg and Austria are instead required (unless during that period theyelect otherwise) to operate a withholding system in relation to such payments(the ending of such transitional period being dependent upon the conclusion ofcertain other agreements relating to information exchange with certain othercountries). A number of non-European Union countries and territories, includingSwitzerland, have agreed to adopt similar measures (a withholding system in thecase of Switzerland) with effect from the same date.

As part of anagreement reached in connection with the EU Savings Directive on the taxationof savings income in the form of interest payments, in line with steps taken byother relevant third countries. Jersey introduced, with effect from July 1, 2005, a retention tax systemin respect of payments of interest, or other similar income, made to anindividual beneficial owner resident in an EU Member State by a paying agentsituated in Jersey (the terms “beneficial owner” and “paying agent” for thispurpose are as defined in the EU Savings Tax Directive). The retention taxsystem applies for a transitional period prior to the implementation of asystem of automatic communication to EU Member States of information regardingsuch payments. During this transitional period, such an individual beneficialowner resident in an EU Member State would be entitled to request a paying agentnot to retain tax from such payments but instead to apply a system by which thedetails of such payments are communicated to the tax authorities of the EUMember State in which the beneficial owner is resident.

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**UnitedStates Federal Income Taxation**

The followingsection summarizes the material US federal income tax consequences of thepurchase, ownership and disposition of the series 4 class A issuer notes (the “USnotes”). In general, the summary assumes that a holder acquires the USnotes at original issuance and holds the US notes as capital assets. It doesnot purport to be a comprehensive description of all the taxconsiderations that may be relevant to a decision to purchase the USnotes. In particular, it does not discuss special tax considerations thatmay apply to certain types of taxpayers, including, without limitation,the following: (i) financial institutions; (ii) insurance companies; (iii) dealersor traders in stocks, securities, notional principal contracts or currencies; (iv) tax-exemptentities; (v) regulated investment companies; (vi) persons that willhold the US notes as part of a “hedging” or “conversion” transaction or as aposition in a “straddle” for US federal income tax purposes; (vii) personsthat own (or are deemed to own) 10 per cent. or more of the voting shares ofthe issuer; (viii) persons who hold US notes through partnerships or otherpass-through entities; and (ix) persons that have a “functional currency”other than the US dollar. In addition, this summary does not addressalternative minimum tax consequences, nor does it describe any tax consequencesarising under the laws of any taxing jurisdiction other than the USfederal government.

This summary isbased on the US Internal Revenue Code of 1986, as amended (the “Code”), USTreasury regulations and judicial and administrative interpretations thereof,in each case as in effect or available on the date of filing of this Form 20-F.All of the foregoing are subject to change, and any change may applyretroactively and could affect the tax consequences described below.

**Investorsshould consult their own tax advisors as to the personal US federal income taxconsequences of the purchase, ownership and disposition of the US notes,including the possible application of state, local, non-US or other tax laws,and other US tax issues affecting the transaction.**

As used in thissection, the term “United States holder” means a beneficial owner of US notesthat is for US federal income tax purposes: (i) a citizen or residentof the United States; (ii) a corporation (or other entity treated as acorporation) or partnership, created or organized in or under the laws of theUnited States or any state thereof (including the District of Columbia); (iii) anyestate the income of which is subject to US federal income tax regardless ofthe source of its income; or (iv) any trust if a court within the UnitedStates is able to exercise primary supervision over the administration of thetrust and one or more United States persons have the authority to control allsubstantial decisions of the trust. If a partnership holds US notes, the taxtreatment of a partner will generally depend upon the status of the partner andupon the activities of the partnership. Partners of partnerships holding USnotes should consult their own tax advisers regarding the personal taxconsequences to them. A “Non-United States holder” is a beneficial owner of USnotes that is not a United States holder.

**Taxstatus of the issuer, Funding 1, the mortgages trustee and the mortgages trust**

Each of theissuer, Funding 1 and the mortgages trustee acting it its capacity as trusteeof the mortgages trust covenants not to engage in any activities in the UnitedStates (directly or through agents), not to derive any income from sources withinthe United States as determined under US federal income tax principles, and notto hold any property if doing so would cause it to be engaged or deemed to beengaged in a trade or business within the United States as determined under USfederal income tax principles. Assuming compliance with these covenants, noneof the issuer, Funding 1 or the mortgages trustee acting in its capacity astrustee of the mortgages trust will be subject to US federal income tax. Noelection will be made to treat the issuer, Funding 1 or the mortgages trusteeor any of their assets as a REMIC (a type of securitization vehicle having aspecial tax status under the Code).

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**Characterizationof the US notes**

Although there isno authority regarding the treatment of instruments that are substantiallysimilar to the US notes, and while it is not free from doubt, the issuerbelieves that the US notes will be treated as debt for US federal income taxpurposes. The issuer intends to treat the US notes as indebtedness of theissuer for all purposes, including US tax purposes. The discussion in the nextsection assumes this result.

The US notes willnot be qualifying real property loans in the hands of domestic savings and loanassociations, real estate investment trusts, or REMICs under sections7701(a)(19)(C), 856(c) or 860G(a)(3) of the Code, respectively.

**Taxationof United States holders of the US notes**

*QualifiedStated Interest and Original Issue Discount.*The issuerintends to treat interest on the US notes as “qualified stated interest” underUS Treasury regulations relating to original issue discount (hereafter the “OIDregulations”). As a consequence, discount on the US notes arising from anissuance at less than par will only be required to be accrued under the OIDregulations if such discount exceeds a statutorily defined *de minimis*amount. Qualified stated interest, which generally must be unconditionallypayable at least annually, is taxed under a holder’s normal method ofaccounting as ordinary interest income. *Deminimis* original issue discount (“OID”) is included in income on a *pro rata* basis as principal payments are made on the USnotes.

It is possiblethat interest on the US notes that are class B and class C issuer notes couldbe treated as OID because such interest is subject to deferral in certainlimited circumstances. A United States holder of a US note issued with OID mustinclude OID in income over the term of such US note under a constant yieldmethod that takes into account the compounding of interest. Under the Code, OIDis calculated and accrued using prepayment assumptions where payments on a debtinstrument may be accelerated by reason of prepayments of other obligationssecuring such debt instrument. Moreover, the legislative history to theprovisions provide that the same prepayment assumptions used to price a debtinstrument be used to calculate OID, as well as to accrue market discount andamortize premium. Here, prepayment of the mortgage loans is not expected toalter the scheduled principal payments on the US notes that are class B andclass C issuer notes and, accordingly, the issuer intends to assume that suchUS notes will have their principal repaid according to the schedule forpurposes of accruing any OID. No representation is made that the mortgage loanswill pay on the basis of such prepayment assumption or in accordance with anyother prepayment scenario.

As an alternativeto the above treatments, United States holders may elect to include in grossincome all interest with respect to the US notes, including stated interest,acquisition discount, OID, *de minimis* OID,market discount, *de minimis* market discount, andunstated interest, as adjusted by any amortizable bond premium or acquisitionpremium, using the constant yield method described above.

Interest income onthe US notes will be treated as foreign source income for US federal income taxpurposes, which may be relevant in calculating a United States holder’s foreigntax credit limitation for US federal income tax purposes. The limitation on foreigntaxes eligible for the US foreign tax credit is calculated separately withrespect to specific classes of income. The foreign tax credit rules arecomplex, and United States holders should consult their own tax advisersregarding the availability of a foreign tax credit and the application of thelimitation in their particular circumstances.

*Sales andRetirement.* In general, a United States holder of a US notewill have a tax basis in such US note equal to the cost of the US note to suchholder, and reduced by any payments thereon other than payments of statedinterest. Upon a sale or exchange of the US note, a United States holder 

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will generally recognizegain or loss equal to the difference between the amount realized (less anyaccrued interest, which would be taxable as such) and the holder’s tax basis inthe US note. Such gain or loss will be long-term capital gain or loss if theUnited States holder has held the US note for more than one year at the time ofdisposition. **Investors should consult their own taxadvisors with respect to the treatment of capital gains (which may be taxed atlower rates than ordinary income for taxpayers who are individuals, trusts orestates that hold the US notes for more than one year) and capital losses (thedeductibility of which is subject to limitations) for investors as aconsequence of an investment in the issuer notes.**

**Taxationof Non-United States holders of the US Notes**

Subject to thebackup withholding rules discussed below, a Non-United States holder generallyshould not be subject to US federal income or withholding tax on any paymentson a US note and gain from the sale, redemption or other disposition of a USnote unless: (i) that payment and/or gain is effectively connected withthe conduct by that Non-United States holder of a trade or business in theUnited States; (ii) in the case of any gain realized on the sale orexchange of a US note by an individual Non-United States holder, that holder ispresent in the United States for 183 days or more in the taxable year of thesale, exchange or retirement and certain other conditions are met; or (iii) theNon-United States holder is subject to tax pursuant to provisions of the Codeapplicable to certain expatriates. **Non-United States holdersshould consult their own tax advisors regarding the US federal income and othertax consequences of owning US notes.**

**Alternativecharacterization of the US notes**

The propercharacterization of the arrangement involving the issuer and the holders of theUS notes is not clear because there is no authority on transactions comparableto that contemplated herein. The issuer intends to treat the US notes as debtfor all US federal income tax purposes. Investors should consult their own taxadvisors with respect to the potential impact of an alternativecharacterization of the US notes for US tax purposes.

One possiblealternative characterization is that the US Internal Revenue Service (“IRS”)could assert that the class C or any other class of US notes should be treatedas equity in the issuer for US federal income tax purposes because the issuermay not have substantial equity. If the class C or any other class of US noteswere treated as equity, United States holders of such notes would be treated asowning equity in a passive foreign investment company (“PFIC”) which, dependingon the level of ownership of such United States holder and certain otherfactors, might also constitute an interest in a controlled foreign corporation(“CFC”) for such United States holder. A US note that is treated as a an equityinterest in a PFIC or CFC rather than a debt instrument would have certaintiming and character consequences to a United States holder and could requirecertain elections and disclosures that would need to be made shortly afteracquisition to avoid potentially adverse US tax consequences.

If a United Statesholder were treated as owning an equity interest in a PFIC, unless a UnitedStates holder makes a “QEF election” or “mark to market election”, a UnitedStates holder will be subject to a special tax regime (i) in respect ofgains realized on the sale or other disposition of the relevant notes, and (ii) inrespect of distributions on the relevant notes held for more than one taxableyear to the extent those distributions constitute “excess distributions”.Although not free from doubt, the PFIC rules should not apply to gainrealized in respect of any notes disposed of during the same taxable year inwhich such notes are acquired. An excess distribution generally includesdividends or other distributions received from a PFIC in any taxable year tothe extent the amount of such distributions exceeds 125 per cent. of theaverage distributions for the three preceding years (or, if shorter, theinvestor’s holding period). Because the US notes pay interest at a floatingrate, it is possible that a US holder will receive “excess distributions” as aresult of fluctuations in the rate of USD-LIBOR over the term of the US notes.In general, under the PFIC rules, a United States holder will be required toallocate such excess distributions and any gain realized on a sale of its notesto 

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each day during theUnited States holder’s holding period for the notes, and will be taxable at thehighest rate of taxation applicable to the notes for the year to which theexcess distribution or gain is allocable (without regard to the United Statesholder’s other items of income and loss for such taxable year) (the “deferredtax”). The deferred tax (other than the tax on amounts allocable to the year ofdisposition or receipt of the distribution) will then be increased by aninterest charge computed by reference to the rate generally applicable tounderpayments of tax (which interest charge generally will be non-deductibleinterest expense for individual taxpayers).

The issuer doesnot intent to provide information that would enable a holder of a US note tomake a QEF election, and the mark to market election will only be availableduring any period in which the US notes are traded on a qualifying exchange ormarket. The issuer encourages persons considering the purchase or ownership of10 per cent., or more of any class of US notes (or combination of classes) thatis treated as equity for US federal income tax purposes to consult their owntax advisors regarding the personal US tax consequences resulting from such anacquisition under the special rules applicable to CFCs under the code.

**Backupwithholding and information reporting**

Backup withholding and information reporting requirements may apply tocertain payments on the US notes and proceeds of the sale or redemption of theUS notes to United States holders. The issuer, its agent, a broker, orany paying agent, as the case may be, may be required to withhold tax from anypayment that is subject to backup withholding if the United States holder failsto furnish the United States holder’s taxpayer identification number (usuallyon IRS Form W-9), to certify that such United States holder is notsubject to backup withholding, or to otherwise comply with the applicablerequirements of the backup withholding rules. Certain United States holders (including, among others,corporations) are not subject to the backup withholding and informationreporting requirements. Non-United States holders may be required to complywith applicable certification procedures (usually on IRS Form W-8BEN)to establish that they are not United States holders in order to avoid theapplication of such information reporting requirements and backup withholding.

Payments ofprincipal or interest made to or through a foreign office of a custodian,nominee or other agent acting on behalf of a beneficial owner of a US notegenerally will not be subject to backup withholding. However, if suchcustodian, nominee or other agent is (i) a United States person (asdefined in section 7701(a)(30) of the Code), (ii) a controlled foreigncorporation (as defined in section 957(a) of the Code), (iii) aforeign person 50 per cent. or more of whose gross income is effectivelyconnected with a US trade or business for a specified three-year period, or (iv) aforeign partnership if (A) at any time during its tax year, one or more ofits partners are United States persons (as defined in applicable Treasuryregulations) who in the aggregate hold more than 50 per cent. of the income orcapital interest in the partnership or (B) at any time during its taxableyear, it is engaged in a US trade or business (each of (i) through (iv), a“US Connected Holder”), such custodian, nominee or other agent may be subjectto certain information reporting requirements with respect to such paymentunless it has in its records documentary evidence that the beneficial owner isnot a United States holder and certain conditions are met or the beneficialowner otherwise establishes an exemption. Principal and interest paid by the USoffice of a custodian, nominee or agent will be subject to both backupwithholding and information reporting unless the beneficial owner certifies itsnon-US status under penalties of perjury or otherwise establishes an exemption.Payments of proceeds on the sale of a US note made to or through a foreignoffice of a broker will not be subject to backup withholding. However, if suchbroker is a US Connected Holder, information reporting will be required unless thebroker has in its records documentary evidence that the beneficial owner is nota United States holder and certain conditions are met or the beneficial ownerotherwise establishes an exemption. Payments of proceeds on the sale of a USnote made to or through the US office of a broker will be subject to backupwithholding and information reporting unless the beneficial owner certifies,under penalties of perjury, that it is not a US holder or otherwise establishesan exemption.

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Backupwithholding is not an additional tax. Any amounts withheld under the backupwithholding rules will be refunded or credited against the United Statesholder’s US federal income tax liability, provided that the requiredinformation is furnished to the IRS. **Holders of US notes shouldconsult their tax advisors as to their qualification for exemption from backupwithholding and the procedure for obtaining an exemption.**

**MaterialJersey (Channel Islands) Tax Considerations**

Themortgages trustee is resident in Jersey for taxation purposes and will beliable to income tax in Jersey at a rate of 20 per cent. in respect of theprofits it makes from acting as trustee of the mortgages trust. The mortgagestrustee will not be liable for any income tax in Jersey in respect of anyincome it receives in its capacity as mortgages trustee on behalf of thebeneficiaries of the mortgages trust.

F.             *Dividends and PayingAgents*

Notapplicable to annual reports filed on Form 20-F.

G.            *Statement by Experts*

Notapplicable to annual reports filed on Form 20-F.

H.            *Documents on Display*

Theissuer, Funding 1 and the mortgages trustee are subject to the informationrequirements of the U.S. Securities Exchange Act of 1934, as amended, and aretherefore required to file reports, including annual reports on Form 20-F,and other information with the SEC. These materials, including this annualreport and the exhibits thereto, may be inspected and copied at the SEC’spublic reference rooms in Washington, DC, New York, NY and Chicago, IL. Pleasecall the SEC at +1-800-732-0330 for further information onthe public reference rooms. Any filings made by the issuer, Funding 1 or themortgages trustee will be made available to the public over the Internet at theSEC’s web site at http://www.sec.gov.

I.              *Subsidiary Information*

Notapplicable to annual reports filed on Form 20-F.

**Item 11. Quantitative andQualitative Disclosures About Market Risk**

Funding1 has entered into the Funding 1 swap agreement with Halifax plc as the Funding1 swap provider and the security trustee. The issuer has entered into issuerswaps with the issuer swap providers and the security trustee. In general, theswaps are designed to do the following:

·                  Funding 1 swap: to hedge against the possible variance between themortgages trustee variable base rate payable on the variable rate loans, therates of interest payable on the tracker rate loans and the fixed rates ofinterest payable on the fixed rate loans and a LIBOR based rate for three-monthsterling deposits;

·                  issuer dollar currency swaps: to protect the issuer against changesin the sterling to US dollar exchange rate following the closing date and thepossible variance between a LIBOR based rate for three-month sterling depositsand a LIBOR based rate for three-month dollar deposits, applicable to theseries 4 class A issuer notes; and

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·                  issuer euro currency swaps: to protect the issuer against changes inthe sterling to euro exchange rate following the closing date and the possiblevariance between a LIBOR based rate for three-month sterling deposits and aEURIBOR based rate for three month euro deposits applicable to the series 4class B issuer notes and series 4 class C issuer notes.

**TheFunding 1 swap**

Some ofthe loans in the portfolio pay a variable rate of interest for a period of timewhich may either be linked to the mortgages trustee variable base rate orlinked to a variable interest rate other than the mortgages trustee variablebase rate, such as a rate set by the Bank of England or linked to the flexiblevariable rate. Other loans pay a fixed rate of interest for a period of time.However, the interest rate payable by Funding 1 with respect to the issuer termadvances is calculated as a margin over LIBOR for three-month sterlingdeposits. To provide a hedge against the possible variance between:

(1)                                  the mortgages trustee variable base rate payable on the variablerate loans, the rates of interest payable on the tracker rate loans and thefixed rates of interest payable on the fixed rate loans; and

(2)                                  a LIBOR based rate for three-month sterling deposits, Funding 1, theFunding 1 swap provider and the security trustee have entered into the Funding1 swap as amended and restated on March 22, 2006. The Funding 1 swap:

·                  has a notional amount that is sized to hedge against any potentialinterest rate mismatches in relation to the current issues outstanding; and

·                  provides for the notional amount to be increased as appropriate tohedge against similar potential interest rate mismatches in relation to any newissues.

Underthe Funding 1 swap, on each calculation date, the following amounts will becalculated:

·                  the amount produced by applying LIBOR for three-month sterlingdeposits (as determined in respect of the corresponding interest period underthe intercompany loans) plus a spread for the relevant calculation period tothe notional amount of the Funding 1 swap as described later in this section(known as the “calculation period swap provider amount”); and

·                  the amount produced by applying a rate equal to the weighted averageof:

(i)                                     the average of the standard variable mortgage rates or theirequivalent charged to existing borrowers on residential mortgage loans aspublished from time to time, after excluding the highest and the lowest rate,of Abbey National plc, HSBC Bank plc, Cheltenham & Gloucester plc,National Westminster Bank Plc, Nationwide Building Society, Northern Rock plcand Woolwich plc (and where those banks have more than one standard variablerate, the highest of those rates);

(ii)                                  the rates of interest payable on the tracker rate loans; and

(iii)                               the rates of interest payable on the fixed rate loans,

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for therelevant calculation period to the notional amount of the Funding 1 swap (knownas the “calculation period Funding 1 amount”). “Calculation date” is defined asthe first day (or if not a London Business Day, the next succeeding LondonBusiness Day) of each month and any other day on which Funding 1 acquires afurther interest in the trust property from and including the calculation dateimmediately preceding the effective date. “London Business Day” is defined as aday (other than a Saturday or Sunday) on which banks are generally open forbusiness in London.

On eachFunding 1 interest payment date the following amounts will be calculated:

·                  the sum of each of the calculation period swap provider amountscalculated during the preceding interest period; and

·                  the sum of each of the calculation period Funding 1 amountscalculated during the preceding interest period.

Afterthese two amounts are calculated in relation to a Funding 1 interest paymentdate, the following payments will be made on that Funding 1 interest paymentdate:

·                  if the first amount is greater than the second amount, then theFunding 1 swap provider will pay the difference to Funding 1;

·                  if the second amount is greater than the first amount, then Funding1 will pay the difference to the Funding 1 swap provider; and

·                  if the two amounts are equal, neither party will make a payment tothe other.

If apayment is to be made by the Funding 1 swap provider, that payment will beincluded in the Funding 1 available revenue receipts and will be applied on therelevant Funding 1 interest payment date according to the relevant order ofpriority of payments of Funding 1. If a payment is to be made by Funding 1, itwill be made according to the relevant order of priority of payments of Funding1.

Thenotional amount of the Funding 1 swap in respect of a calculation period willbe an amount in sterling equal to:

·                  the aggregate principal amount outstanding of all intercompany loanson the first day of the relevant calculation period, less

·                  the balance of the principal deficiency ledger attributable to allintercompany loans on the first day of the relevant calculation period, less

·                  the amount of the principal receipts in the Funding 1 GIC accountattributable to all intercompany loans on the first day of the relevantcalculation period.

In theevent that the Funding 1 swap is terminated prior to the service of any issuerintercompany loan acceleration notice or final repayment of any intercompanyloan, Funding 1 shall enter into a replacement Funding 1 swap on termsacceptable to the rating agencies, with the security trustee and with a swapprovider whom the rating agencies have previously confirmed in writing toFunding 1, the issuer and the security trustee will not cause the then currentratings of the issuer notes to be downgraded, withdrawn or qualified. IfFunding 1 is unable to enter into a new Funding 1 swap on terms acceptable tothe rating agencies, this may affect amounts available to pay interest on theintercompany loans.

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**Theissuer currency swaps**

Theissuer intercompany loan is denominated in sterling, and interest payable byFunding 1 to the issuer under the issuer term advances is calculated as amargin over LIBOR for three-month sterling deposits. However, some of theissuer notes are denominated in US dollars and accrue interest at either aLIBOR based rate for one-month US dollar deposits or a LIBOR based rate forthree-month US dollar deposits. In addition, the series 4 class B issuer notesand series 4 class C issuer notes are denominated in euro and accrue interestat a EURIBOR based rate for three-month euro deposits. To deal with thepotential interest rate and/or currency mismatch between (i) its receiptsand liabilities in respect of the issuer intercompany loan and (ii) itsreceipts and liabilities under the issuer notes, the issuer has, pursuant tothe terms of the issuer currency swaps, swapped its receipts and liabilities inrespect of all euro denominated issuer notes and all US dollar denominatedissuer notes into sterling on terms that match the issuer’s obligations underthe US dollar denominated issuer notes or the euro denominated issuer notes, asapplicable.

The currencyamount of each issuer swap is the principal amount outstanding under the issuernotes to which the relevant issuer currency swap relates. Subject, in the caseof the class B and C issuer swaps, to certain deferral of interest provisionsthat will apply when payment of interest under the corresponding offered issuernotes is deferred in accordance with the terms and conditions of such offeredissuer notes, the issuer swap providers will pay to the issuer amounts in USdollars or euro, as applicable that are equal to the amounts of interest to bepaid on each of the classes of the offered issuer notes and the issuer will payto the issuer swap providers the sterling interest amounts received on theissuer term advances corresponding to the classes of the offered issuer notes.In order to allow for the effective currency amount of each issuer currencyswap to amortize at the same rate as the relevant series and class of issuernotes, each issuer currency swap agreement provides that as and when the issuernotes amortize, a corresponding portion of the relevant issuer swap soterminated will be swapped from sterling into US dollars at the relevant dollarcurrency exchange rate or into euro at the euro currency exchange rate, asapplicable.

Thepayment obligations of the series 4 issuer swap provider under the relevantissuer swaps are guaranteed by the series 4 issuer swap guarantor pursuant to aguarantee (the “series 4 issuer swap guarantee”).

In theevent that any issuer currency swap is terminated prior to the service of anissuer note acceleration notice or the final redemption of the relevant USdollar denominated or euro denominated issuer notes, as applicable, the issuershall enter into a replacement issuer currency swap in respect of that classand series of issuer notes. Any replacement issuer swap must be entered into onterms acceptable to the rating agencies, the issuer and the security trusteeand with a replacement issuer currency swap provider whom the rating agencieshave previously confirmed in writing to the issuer and the security trusteewill not cause the then current ratings of the issuer notes to be downgraded,withdrawn or qualified. If the issuer is unable to enter into any replacementissuer currency swaps on terms acceptable to the rating agencies, this mayaffect amounts available to pay amounts due under the issuer notes.

If anissuer currency swap agreement is terminated and the issuer is unable to enterinto a replacement swap as described above, then any payments received by the issuerfrom Funding 1 on each Funding 1 interest payment date shall be deposited inthe issuer bank account (or such other account opened for this purpose) andapplied by the issuer to repay the issuer notes on each interest payment dateafter exchanging at the “spot” rate, the relevant proceeds from sterling intoUS dollars or euros as required.

**Ratingsdowngrade of swap providers**

Undereach of the swap agreements, in the event that the relevant rating(s) of aswap provider, or its respective guarantor, as applicable, is or are, asapplicable, downgraded by a rating agency 

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below therating(s) specified in the relevant swap agreement (in accordance with therequirements of the rating agencies) for such swap provider, and, as a resultof the downgrade, the then current ratings of the current notes, in respect ofthe Funding 1 swap, or the issuer notes corresponding to the relevant issuerswap, in respect of the relevant issuer swap, would or may, as applicable, beseverely affected, the relevant swap provider will in accordance with theFunding 1 swap or the relevant issuer swap, as applicable, be required to takecertain remedial measures which may include providing collateral for itsobligations under the relevant swap, arranging for its obligations under therelevant swap to be transferred to an entity with rating(s) required bythe relevant rating agency as specified in the relevant swap agreement (inaccordance with the requirements of the rating agency), procuring anotherentity with rating(s) required by the relevant rating agency as specifiedin the relevant swap agreement (in accordance with the requirements of therating agency), to become co-obligor or guarantor, as applicable, in respect ofits obligations under the relevant swap, or taking such other action as it mayagree with the relevant rating agency.

Inlight of the credit rating of Credit Suisse International (“CSi”) as at theclosing date and at the date of this filing, CSi, as series 2 issuer swapprovider, has provided collateral for its obligations under the series 2 issuerswaps from the effective date of such issuer swaps. In the event that CSi’scredit rating is restored to the level required under the relevant issuer swapagreements, the obligation to post collateral will cease.

**Terminationof the swaps**

TheFunding 1 swap will terminate on the date on which the aggregate principalamount outstanding under all intercompany loans is reduced to zero.

Eachissuer swap other than the series 2 class A issuer swap, the series 3 class Aissuer swap and the series 4 class A issuer swap will terminate on the earlierof the interest payment date falling in June 2042 and the date on whichall of the relevant class and series of issuer notes are redeemed in full. Theseries 2 class A issuer swap will terminate on the earlier of the interestpayment date falling in September 2007 and the date on which the series 2class A issuer notes are redeemed in full. The series 3 class A issuer swapwill terminate on the earlier of the interest payment date falling in December 2032and the date on which the series 3 class A issuer notes are redeemed in full.The series 4 class A issuer swap will terminate on the earlier of the interestpayment date falling in December 2009 and the date on which the series 4class A issuer notes are redeemed in full.

Anyswap may also be terminated in any of the following circumstances, eachreferred to as a “swap early termination event”:

·                  if there is a failure by a party to pay any amounts due under thatswap and any applicable grace period has expired;

·                  in respect of the issuer swaps, if an event of default under therelevant class of issuer notes occurs and the security trustee serves an issuernote acceleration notice;

·                  in respect of the Funding 1 swap, if an event of default under anyintercompany loan occurs and the security trustee serves an intercompany loanacceleration notice;

·                  in respect of the issuer swaps, at the option of the issuer, and inrespect of the Funding 1 swap, at the option of Funding 1 if certain tax representationsby the relevant issuer swap provider prove to have been untrue or misleading inany material respect;

·                  in respect of the issuer swaps, at the option of the relevant issuerswap provider, and in respect of the Funding 1 swap, at the option of theFunding 1 swap provider, if certain insolvency events occur with respect to theissuer or Funding 1;

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·                  in respect of the issuer swaps, at the option of the issuer, and inrespect of the Funding 1 swap, at the option of Funding 1, upon the occurrenceof an insolvency of the relevant swap provider, or its guarantor, asapplicable, or the merger of the relevant swap provider without an assumptionof its obligations under the relevant swap agreement, or if a materialmisrepresentation is made by the swap provider under the relevant swapagreement, or if the relevant swap provider defaults under an over-the-counterderivatives transaction under another agreement between the issuer and suchswap provider; or if a breach of a provision of the relevant swap agreement bythe swap provider is not remedied within the applicable grace period, or, ifapplicable, if the guarantor of the relevant swap provider fails to comply withits obligations under the guarantee;

·                  if a change in law results in the obligations of one of the partiesbecoming illegal;

·                  if the relevant swap provider or its guarantor, as applicable, isdowngraded and fails to comply with the requirements of the ratings downgradeprovision contained in the relevant swap agreement; and

·                  in the case of the series 4 issuer swaps, at the option of theseries 4 issuer swap guarantor but subject to obtaining the consent of thesecurity trustee, if withholding taxes are imposed on payments made by theseries 4 issuer swap guarantor under the series 4 issuer swap guarantee.

Uponthe occurrence of a swap early termination event, the issuer or the relevantissuer swap provider may be liable to make a termination payment to the otherparty (in the case of the issuer swap) and/or Funding 1 or the Funding 1 swapprovider may be liable to make a termination payment to the other party (in thecase of the Funding 1 swap). This termination payment will be calculated andmade in sterling. The amount of any termination payment will be based on themarket value of the terminated swap based on market quotations of the cost ofentering into a swap with the same terms and conditions that would have theeffect of preserving the respective full payment obligations of the parties (orbased upon a good faith determination of total losses (or gains) if aninsufficient number of quotations can be obtained or if basing the valuation onquotations would not produce a commercially reasonable result). Any suchtermination payment could be substantial.

If anyissuer swap is terminated early and a termination payment is due by the issuerto an issuer swap provider, then, pursuant to its obligations under the issuerintercompany loan, Funding 1 shall pay to the issuer an amount equal to thetermination payment due to the relevant issuer swap provider less any amountreceived by the issuer under any replacement issuer swap agreement. Thesepayments will be made by Funding 1 only after paying interest amounts due onthe issuer term advances and after providing for any debit balance on theprincipal deficiency ledger. The issuer shall apply amounts received fromFunding 1 under the issuer intercompany loan in accordance with the issuerpre-enforcement revenue priority of payments or, as the case may be, the issuerpost-enforcement priority of payments. The application by the issuer oftermination payments due to an issuer swap provider may affect the fundsavailable to pay amounts due to noteholders.

If theissuer receives a termination payment from an issuer swap provider, then theissuer shall use those funds towards meeting its costs in effecting currencyexchanges at the applicable spot rate of exchange until a replacement issuercurrency swap is entered into and/or to acquire a replacement issuer currencyswap.

Noteholderswill not receive extra amounts (over and above interest and principal payableon the issuer notes) as a result of the issuer receiving a termination payment.

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**Transferof the swaps**

Each swapprovider may, subject to certain conditions specified in the relevant swapagreement, including (without limitation) the satisfaction of certainrequirements of the rating agencies, transfer its obligations under any of theswaps to another entity.

**Taxation**

NeitherFunding 1 nor the issuer is obliged under any of the swaps to gross up paymentsmade by them if withholding taxes are imposed on payments made under theFunding 1 swap or the issuer swaps.

Eachswap provider will generally be obliged to gross up payments made by it toFunding 1 or the issuer if withholding taxes are imposed on payments made underthe Funding 1 swap or the issuer swaps.

The series 4issuer swap guarantor will be obliged to gross up payments made by it to theissuer if withholding taxes are imposed on payments under the series 4 issuerswap guarantee. However if the series 4 issuer swap guarantor is required togross up a payment under the series 4 issuer swap guarantee in respect of arelevant issuer currency swap, the series 4 issuer swap guarantor may, subjectto the consent of the security trustee, terminate the relevant issuer currencyswap.

**Item 12. Description ofSecurities Other than Equity Securities**

Notapplicable to annual reports filed on Form 20-F.

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**PART II**

**Item 13. Defaults,Dividend Arrearages and Delinquencies**

None.

**Item 14. MaterialModifications to the Rights of Security Holders and Use of Proceeds**

None.

**Item 15. Controls andProcedures**

Notapplicable.

**Item 16. [Reserved]**

**Item 16A. Audit CommitteeFinancial Expert**

Notapplicable.

**Item 16B. Code of Ethics**

Notapplicable.

**Item 16C. PrincipalAccountant Fees and Services**

Notapplicable.

**Item 16D. Exemptions fromthe Listing Standards for Audit Committees**

Notapplicable.

**Item 16E. Purchases ofEquity Securities by the Issuer and Affiliated Purchasers**

Notapplicable.

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**PART III**

**Item 17. FinancialStatements**

Notapplicable.

**Item 18. FinancialStatements**

Notapplicable.

**Item 19. Exhibits**

Thefollowing documents are filed as part of the Annual Report on Form 20-F:

Exhibit 1:a copy of the Memorandum and Articles of Association of each of the issuer,Funding 1 and the mortgages trustee is incorporated by reference from theRegistration Statement.

Exhibit 2:instruments defining the rights of the security holders as described in theRegistration Statement are incorporated by reference from the RegistrationStatement.

Exhibit 12:Section 302 certification.

Exhibit 15.1:Investor’s Report for the month of January 2005 (incorporated by referencefrom the Form 6-K previously filed on February 08, 2005).

Exhibit 15.2:Investor’s Report for the month of February 2005 (incorporated byreference from the Form 6-K previously filed on March 31,2005).

Exhibit 15.3:Investor’s Report for the month of March 2005 (incorporated by referencefrom the Form 6-K previously filed on April 20, 2005).

Exhibit 15.4:Investor’s Report for the month of April 2005 (incorporated by referencefrom the Form 6-K previously filed on May 12, 2005).

Exhibit 15.5:Investor’s Report for the month of May 2005 (incorporated by referencefrom the Form 6-K previously filed on June 27, 2005).

Exhibit 15.6:Investor’s Report for the month of June 2005 (incorporated by referencefrom the Form 6-K previously filed on July 21, 2005).

Exhibit 15.7:Investor’s Report for the month of July 2005 (incorporated by referencefrom the Form 6-K previously filed on August 19, 2005).

Exhibit 15.8:Investor’s Report for the month of August 2005 (incorporated by referencefrom the Form 6-K previously filed on September 27, 2005).

Exhibit 15.9:Investor’s Report for the month of September 2005 (incorporated byreference from the Form 6-K previously filed on October 27,2005).

Exhibit 15.10:Investor’s Report for the month of October 2005 (incorporated by referencefrom the Form 6-K previously filed on November 23, 2005).

Exhibit 15.11:Investor’s Report for the month of November 2005 (incorporated byreference from the Form 6-K previously filed on December 23,2005).

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Exhibit 15.12:Investor’s Report for the month of December 2005 (incorporated byreference from the Form 6-K previously filed on January 20,2006).

Exhibit 99.1:Annual Compliance Certificate for year end December 31, 2005.

Exhibit 99.2:Report of Independent Accountants.

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**SIGNATURES**

Eachregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersignedto sign this annual report on its behalf.
|                           |   | PERMANENT FINANCING (NO. 2) PLC     |
|---------------------------|--------|-------------------------------------|
|                      |   |                                |   |   |
|                      |   | By:                                 |   | /s/ David Balai |
|                      |   | Name:                               |   | David Balai |
|                      |   | Title:                              |   | Director |
|                      |   |                                |   |   |
|                      |   |                                |   |   |
|                      |   | PERMANENT FUNDING (NO. 1) LIMITED   |
|                      |   |                                |   |   |
|                      |   | By:                                 |   | /s/ David Balai |
|                      |   | Name:                               |   | David Balai |
|                      |   | Title:                              |   | Director |
|                      |   |                                |   |   |
|                      |   |                                |   |   |
|                      |   | PERMANENT MORTGAGES TRUSTEE LIMITED |
|                      |   |                                |   |   |
|                      |   | By:                                 |   | /s/ David Balai |
| Date:  June 26, 2006 |   | Name:                               |   | David Balai |
|                      |   | Title:                              |   | Director |

 

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