<PAGE>

      As filed with the Securities and Exchange Commission on July 1, 2003

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

[_]  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, 2002
                                       OR
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934     For the transition period from    N/A to    N/A

Commission file number: 333-14002

<TABLE>
<S>                                  <C>                                                       <C>
      Holmes Financing (No. 5) PLC                  Holmes Funding Limited                     Holmes Trustees Limited
                                     (Exact name of Registrant as Specified in its Charter)
             United Kingdom                             United Kingdom                             United Kingdom
                                         (Jurisdiction of Incorporation or Organization)
          Abbey National House                       Abbey National House                       Abbey National House
            2 Triton Square                            2 Triton Square                             2 Triton Square
             Regent's Place                             Regent's Place                             Regent's Place
             London NW1 3AN                             London NW1 3AN                             London NW1 3AN
             United Kingdom                             United Kingdom                             United Kingdom
         (011-44-20) 7612 4000                      (011-44-20) 7612 4000                       (011-44-20) 7612 4000
                                               (Address of Principal Executive Offices)
</TABLE>

Securities registered or to be registered pursuant to Section 12(b) of the Act:
                                      None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
                                      None
Securities for which there is a reporting obligation pursuant to Section 15(d)
                                   of the Act.

<TABLE>
<CAPTION>
Title of each class                                                     Name of each exchange on which registered
-------------------                                                     -----------------------------------------
<S>                                                                     <C>
$35,000,000 Series 1 Class B Asset Backed Floating Rate Notes (1)                          None
$52,000,000 Series 1 Class C Asset Backed Floating Rate Notes (1)                          None
$750,000,000 Series 2 Class A1 Asset Backed Floating Rate Notes (1)                        None
$35,000,000 Series 2 Class B Asset Backed Floating Rate Notes (1)                          None
$52,000,000 Series 2 Class C Asset Backed Floating Rate Notes (1)                          None
(Pounds)24,500,000 Series 1 Term AA Advance (2)                                            None
(Pounds)36,500,000 Series 1 Term BBB Advance (2)                                           None
(Pounds)527,500,000 Series 2A1 Term AAA Advance (2)                                        None
(Pounds)170,000,000 Series 2A2 Term AAA Advance (2)                                        None
(Pounds)24,500,000 Series 2 Term AA Advance (2)                                            None
(Pounds)36,500,000 Series 2 Term BBB Advance (2)                                           None
Funding Interest in the Mortgages Trust (3)                                                None
</TABLE>

(1) Holmes Financing (No. 5) PLC is the registrant for the Series 1 Issuer
    Notes and the Series 2 Issuer Notes.
(2) Holmes Funding Limited is the registrant for the Term Advances, and has
    issued those term advances to Holmes Financing (No. 5) PLC. The Term
    Advances are the primary source of payments on the Series 1 Issuer Notes
    and the Series 2 Issuer Notes, respectively.
(3) Holmes Trustees Limited is the registrant for the Funding Interest in the
    Mortgages Trust and is holding the Funding Interest on behalf of Holmes
    Funding Limited.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [_]

Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [_] Item 18 [_] Financial statements attached as Exhibits [X]

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                  ----
<S>                                                                                               <C>
 Presentation of Information .................................................................       1
 Forward-looking Statements ..................................................................       2
 Incorporation of Certain Documents by Reference .............................................       2

                                               PART I

 Item 1.       Identity of Directors, Senior Management and Advisors .........................       3
 Item 2.       Offer Statistics and Expected Timetable .......................................       3
 Item 3.       Key Information ...............................................................       3
                  Selected Financial Information .............................................       3
                  Risk Factors ...............................................................       4
 Item 4.       Information on the Company ....................................................      27
                  Property, Plant and Equipment ..............................................      28
 Item 5.       Operating and Financial Review and Prospects ..................................      28
 Item 6.       Directors, Senior Management and Employees ....................................      28
                  Directors and Senior Management ............................................      28
                  Compensation ...............................................................      30
                  Board Practices ............................................................      30
                  Employees ..................................................................      30
                  Share Ownership ............................................................      30
 Item 7.       Major Shareholders and Related Party Transactions .............................      30
                  Major Shareholders .........................................................      30
 Item 8.       Financial Information .........................................................      30
 Item 9.       The Listing ...................................................................      30
                  Markets ....................................................................      30
 Item 10.      Additional Information ........................................................      31
                  Material Contracts .........................................................      31
                  Exchange Controls ..........................................................      31
                  Taxation ...................................................................      31
                  Documents on Display .......................................................      36
 Item 11.      Quantitative and Qualitative Disclosures About Market Risk ....................      36
 Item 12.      Description of Securities Other Than Equity Securities ........................      36

                                              PART II

 Item 13.      Defaults, Dividend Arrearages and Delinquencies ...............................      36
 Item 14.      Material Modifications to the Rights of Security Holders ......................      36
 Item 15.      Controls and Procedures .......................................................      36
 Item 16.      Reserved ......................................................................      36

                                              PART III

 Item 19.      Exhibits ......................................................................      37
</TABLE>

<PAGE>

                           PRESENTATION OF INFORMATION

         This Annual Report on Form 20-F relates to Holmes Financing (No. 5) PLC
(the "Issuer") and the following securities (the "Issuer Notes"), which were
issued pursuant to a trust deed dated November 8, 2001 (the "Issuer Trust
Deed"), between the Issuer and The Chase Manhattan Bank, London Branch, as note
trustee (the "Note Trustee"):

         .  $35,000,000 Series 1 Class B Asset Backed Floating Rate Notes Due
            July 2040
         .  $52,000,000 Series 1 Class C Asset Backed Floating Rate Notes Due
            July 2040
         .  $750,000,000 Series 2 Class A1 Asset Backed Floating Rate Notes Due
            October 2006
         .  $35,000,000 Series 2 Class B Asset Backed Floating Rate Notes Due
            July 2040
         .  $52,000,000 Series 2 Class C Asset Backed Floating Rate Notes Due
            July 2040

         This Annual Report on Form 20-F also relates to the following advances
made pursuant to the loan confirmation intercompany loan agreement dated
November 8, 2001 (the "Intercompany Loan Agreement"), between the Issuer, Holmes
Funding Limited ("Funding"), and The Chase Manhattan Bank, London Branch, as
security trustee and agent bank:

         .  (Pounds)24,500,000 Series 1 Term AA Advance
         .  (Pounds)36,500,000 Series 1 Term BBB Advance
         .  (Pounds)527,500,000 Series 2A1 Term AAA Advance
         .  (Pounds)170,000,000 Series 2A2 Term AAA Advance
         .  (Pounds)24,500,000 Series 2 Term AA Advance
         .  (Pounds)36,500,000 Series 2 Term BBB Advance

         This Annual Report on Form 20-F further relates to the funding interest
in the mortgage trust, the property of which includes the loans in the portfolio
at the closing date or which have subsequently been assigned to the mortgages
trustee thereafter (including any new drawings under flexible loans) and their
related security and any income generated by the loans or their related
security. The composition of the trust property will fluctuate as drawings under
flexible loans and new loans are added and as the loans that were previously
part of the trust property are repaid, mature, default or are repurchased by
Abbey National plc (the "seller"). The trust property also includes any money in
the mortgages trustee guaranteed investment contract (or GIC) account and in any
other bank account or bank accounts held by the mortgages trustee (as agreed by
the mortgages trustee, Funding, the seller and the security trustee) from time
to time, called the alternative accounts. The mortgages trustee GIC account is
the bank account in which the mortgages trustee holds any cash that is part of
the trust property until it is distributed to the beneficiaries. The alternative
accounts are accounts into which payments by some mortgage borrowers are paid
initially.

         Capitalized terms used herein and not defined have the same meaning
ascribed to such terms in the Registration Statement on Form S-11 relating to
the securities (file number 333-14002).

         The information required for some items in Form 20-F is not applicable
to the Issuer, Funding or Holmes Trustees Limited ("Trustees"). As used in this
Annual Report filed on Form 20-F, "not applicable" or "Not Applicable" means
that the response to the referenced item is omitted in reliance on the
procedures outlined in numerous no-action letters issued by the staff of the
U.S. Securities and Exchange Commission with respect to issuers of substantially
similar asset-backed securities that file annual reports on Form 10-K, or that
the referenced item is otherwise not applicable.

                                        1

<PAGE>

                           FORWARD-LOOKING STATEMENTS

         This annual report may contain forward-looking statements. All
statements regarding our future financial condition, results of operations and
business strategy, plans and objectives are forward-looking. Statements
containing the words "believes", "intends", "expects" and words of similar
meaning are also forward-looking. In particular, the following are
forward-looking in nature: statements with regard to strategy and management
objectives; product development efforts; the effects of changes or prospective
changes in regulation; and trends in results, operations and overall market
trends.

         These forward-looking statements involve risks, uncertainties and other
factors, some of which are beyond our control, that may cause our results,
performance or achievements or conditions in the markets in which we operate to
differ from those expressed or implied in these forward-looking statements. We
caution you not to place undue reliance on these forward-looking statements,
which reflect our management's view only as of the date of this annual report,
and we do not undertake to update or revise any of them, whether as a result of
new information, future events or otherwise.

                 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

         Each of the Issuer, Funding and Trustees incorporates by reference its
periodic filings on Form 6-K, which contain all financial information relating
to the securities relevant to the holders of the Issuer Notes.

                                        2

<PAGE>

                                     PART I

Item 1.  Identity of Directors, Senior Management and Advisers

         Not applicable to annual reports on Form 20-F.

Item 2.  Offer Statistics and Expected Timetable

         Not applicable to annual reports on Form 20-F.

Item 3.  Key Information

         A. Selected Financial Information

         Each of the Issuer, Funding and Trustees incorporates by reference and
attaches hereto as exhibits the following reports, filed on Form 6-K, which
include all financial information relating to the securities that is relevant to
holders of the Issuer Notes:

         .  Periodic Report for the period from November 9, 2001 to December 10,
            2001.

         .  Periodic Report for the period from December 11, 2001 to January 8,
            2002.

         .  Periodic Report for the period from January 9, 2002 to February 8,
            2002.

         .  Periodic Report for the period from February 9, 2002 to March 8,
            2002.

         .  Periodic Report for the period from March 9, 2002 to April 8, 2002.

         .  Periodic Report for the period from April 9, 2002 to May 8, 2002.

         .  Periodic Report for the period from May 9, 2002 to June 10, 2002.

         .  Periodic Report for the period from June 11, 2002 to July 8, 2002.

         .  Periodic Report for the period from July 9, 2002 to August 8, 2002.

         .  Periodic Report for the period from August 9, 2002 to September 9,
            2002.

         .  Periodic Report for the period from September 10, 2002 to October 9,
            2002.

         .  Periodic Report for the period from October 9, 2002 to November 8,
            2002.

         .  Profit and Loss Accounts for Trustees for the period ended January
            15, 2002.

         .  Profit and Loss Accounts for Trustees for the period ended April 15,
            2002.

         .  Profit and Loss Accounts for Trustees for the period ended July 15,
            2002.

         .  Profit and Loss Accounts for Trustees for the period ended October
            15, 2002.

         .  Balance Sheets for Trustees for the period ended October 15, 2002.

         .  Balance Sheets for Funding for the period ended October 15, 2002.

         The following document is also incorporated by reference from reports
filed on Form 6-K:

                                        3

<PAGE>

         .  Certificate Relating to Financial Information pursuant to the Issuer
            Trust Deed dated April 30, 2003

         The following documents are filed as exhibits to this Annual Report on
Form 20-F:

         .  Report and Accounts for Holmes Financing (No. 5) PLC for the year
            ended December 31, 2002

         .  Report and Accounts for Holmes Funding Limited for the year ended
            December 31, 2002

         .  Report and Accounts for Holmes Trustees Limited for the year ended
            December 31, 2002

         B. Capitalization and Indebtedness

         Not applicable to annual reports on Form 20-F.

         C. Reasons for the Offer and Use of Proceeds

         Not applicable to annual reports on Form 20-F.

         D. Risk Factors

The Issuer Notes do not represent an obligation and are not the responsibility
of any person other than the Issuer

      The Issuer Notes do not represent an obligation and are not the
responsibility of any of Abbey National plc or any of its affiliates, Credit
Suisse First Boston Corporation, Salomon Smith Barney Inc., Lehman Brothers
Inc., the other underwriters or any of their respective affiliates, Citibank,
N.A., the other issuers, Trustees, the Note Trustee or any other party to the
transaction other than the Issuer.

The Issuer has a limited set of resources available to it to make payments on
the Issuer Notes

      The Issuer's ability to make payments of principal and interest on the
Issuer Notes and to pay its operating and administrative expenses will depend
primarily on the funds being received under the issuer intercompany loan. In
addition, the Issuer will rely on the issuer dollar currency swaps, the issuer
Swiss franc currency swaps and the issuer euro currency swaps to provide
payments on the Issuer Notes denominated in U.S. dollars and in euro.

      If Funding is unable to pay in full on any interest payment date (a) the
interest on any term advance, (b) the operating and administrative expenses
and/or (c) the principal payments in respect of the previous issuer series 1
term AAA advances made by the other issuers and the issuer series 1 term AAA
advance on their maturity dates, respectively, and in the event that the seller
suffers a certain ratings downgrade, Funding may draw money from the Funding
liquidity reserve fund.

      The Issuer does not have any other significant sources of funds available
to meet its obligations under the Issuer Notes and/or any other payments ranking
in priority to the Issuer Notes.

Funding is not obliged to make payments on the issuer term advances if it does
not have enough money to do so which could adversely affect payments on the
Issuer Notes

      Funding's ability to pay amounts due on the issuer term advances will
depend upon:

      .  Funding receiving enough funds from the Funding share percentage of the
         revenue and principal receipts on the loans included in the mortgages
         trust on or before each interest payment date;

      .  Funding receiving the required funds from the Funding swap provider;

      .  the amount of funds credited to the reserve funds;

                                        4

<PAGE>

      .  Funding making drawings as permitted under the Funding liquidity
         facility; and

      .  the allocation of funds between the other term advances, the issuer
         term advances and any new term advances.

      According to the terms of the mortgages trust deed, Trustees is obliged to
pay to Funding the Funding share percentage of revenue receipts on the loans by
crediting such amounts to the Funding GIC account on each distribution date. The
mortgages trustee is obliged to pay Funding principal receipts on the loans by
crediting such amounts to the Funding GIC account as and when required pursuant
to the terms of the mortgages trust deed.

      Funding will be obliged to pay revenue receipts due to the Issuer under
the issuer intercompany loan only to the extent that it has revenue receipts
left over after making payments ranking in priority to the Issuer, such as
payments of certain fees and expenses of Funding and payments on certain higher
ranking term advances under the other intercompany loans.

      Funding will be obliged to pay principal receipts due to the Issuer under
the issuer intercompany loan only to the extent that it has principal receipts
available for that purpose after repaying amounts ranking in priority to the
Issuer (including repaying certain higher ranking term advances under the other
intercompany loans).

      If there is a shortfall between the amounts payable by Funding to the
Issuer under the Intercompany Loan Agreement and the amounts payable by the
Issuer on the Issuer Notes, noteholders may, depending on what other sources of
funds are available to the Issuer and to Funding, not receive the full amount of
interest and/or principal which would otherwise be due and payable on the Issuer
Notes.

Failure by Funding to meet its obligations under the Intercompany Loan Agreement
would adversely affect payments on the Issuer Notes

      If Funding does not make payments due and payable on the issuer
intercompany loan, then the Issuer may not have enough money to make payments on
the Issuer Notes. In addition the Issuer will have only limited recourse to the
assets of Funding. If Funding does not pay amounts under the issuer intercompany
loan because it does not have enough money available, such amounts will be
deemed not to be due and payable, so there will not be an event of default under
the issuer intercompany loan, and the Issuer will not have recourse to the
assets of Funding in that instance.

On the final repayment date of the issuer intercompany loan any outstanding
amounts in respect of the term AA advances and the term A advances will be
extinguished, which would cause a loss on the class B notes and the class M
notes

      The transaction has been structured in the expectation that on the final
repayment date of the intercompany loan in 2040, the interest and principal due
and payable on the term AA advances and the term A advances should be an amount
equal to the sum available to pay all outstanding interest and/or principal
(including interest and/or principal deferred and unpaid) on the term AA
advances and the term A advances (after paying amounts of a higher order of
priority as required by the Funding priority of payments).

      If there is a shortfall between the amount available to pay such interest
and/or principal and the amount required to pay all outstanding interest and/or
principal on the term AA advances and the term BBB advances, then the shortfall
will be deemed to be not due and payable under the Intercompany Loan Agreement
and we will not have any claim against Funding for the shortfall.

      If there is such a shortfall in interest and/or principal payments under
the Intercompany Loan Agreement, noteholders may not receive the full amount of
interest and/or principal which would otherwise be due and payable on the class
B Issuer Notes or the class M Issuer Notes outstanding.

                                        5

<PAGE>

Enforcement of the Issuer security is the only remedy for a default in the
Issuer's obligations, and the proceeds of that enforcement may not be enough to
make payments on the Issuer Notes

      The only remedy for recovering amounts on the Issuer Notes is through the
enforcement of the Issuer security. The Issuer has no recourse to the assets of
Funding unless Funding has also defaulted on its obligations under the issuer
intercompany loan and the Funding security has been enforced.

      If the security created as required by the Issuer deed of charge is
enforced, the proceeds of enforcement may be insufficient to pay all principal
and interest due on the Issuer Notes.

The transaction has been structured in the expectation that the series 1 Issuer
Notes will be redeemed before the series 2 Issuer Notes

      The transaction has been structured in the expectation that the series 1
Issuer Notes will be redeemed in full prior to the redemption of the series 2
Issuer Notes and the series 3 Issuer Notes; the series 2 Issuer Notes will be
redeemed in full prior to the redemption of the series 3 Issuer Notes; and the
series 3 class Al Issuer Notes will be redeemed in full prior to the redemption
of the series 3 class A2 Issuer Notes.

      This means, among other things, that the series 1 class B Issuer Notes and
the series 1 class C Issuer Notes are expected to be redeemed before the series
2 class A Issuer Notes and the series 3 class A Issuer Notes, even though the
series 2 class A Issuer Notes and the series 3 class A Issuer Notes have a
higher rating than the series 1 class B Issuer Notes and the series 1 class C
Issuer Notes.

      There is no assurance that the series 1 Issuer Notes will be redeemed in
full before the series 2 Issuer Notes and the series 3 Issuer Notes or that the
series 2 Issuer Notes will be redeemed in full before the series 3 Issuer Notes
or that the series 3 class Al Issuer Notes will be redeemed in full before the
series 3 class A2 Issuer Notes, and so on. In each case, redemption of the
Issuer Notes is ultimately dependent on, among other things, repayment and
redemptions on the loans and on the term advance rating of the issuer term
advances. Further, if on any interest payment date, amounts are due and payable
in respect of the class A Issuer Notes of any series and amounts are due and
payable in respect of the class B Issuer Notes of any series and/or the class C
Issuer Notes of any series, then payments of principal will be made on the class
A Issuer Notes in priority to payments 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 of the class B Issuer Notes of any series and the
class C Issuer Notes of any series, then payments of principal will be made on
the class B Issuer Notes in priority to payments of principal on the class C
Issuer Notes. See "Subordination of other note classes may not protect
noteholders from all risk of loss."

Holdings may establish another company, Funding 2, which may become an
additional beneficiary under the mortgages trust

      Holdings may establish a new entity, Funding 2, which may issue new notes
from time to time and use the proceeds to make a payment to the seller to
acquire an interest in the trust property rather than lending the proceeds to
Funding, subject to the agreement of the seller and Funding, as existing
beneficiaries of the mortgages trust. If Funding 2 becomes a beneficiary of the
mortgages trust then the percentage shares of Funding and the seller in the
trust property may decrease. The introduction of Funding 2 will not cause a
reduction in the principal amount of assets backing the Issuer Notes. The
security trustee will only be entitled to consent to any modifications to the
transaction documents caused by the introduction of Funding 2, if it is
satisfied that such modifications would not adversely affect the then current
ratings of the notes.

      If Funding 2 becomes a beneficiary of the mortgages trust then the seller,
Funding and Funding 2 would each have a joint and undivided interest in the
trust property but their entitlement to the proceeds from the trust property
would be in proportion to their respective shares of the trust property. On each
distribution date the mortgages trustee would distribute interest and principal
receipts to one, two or all three beneficiaries, depending on the terms of the
mortgages trust.

                                        6

<PAGE>

      It is anticipated that Funding 2 would issue notes directly to investors
from time to time backed by its share of the trust property. Current noteholders
would not have a direct or indirect interest in Funding 2's share of the trust
property.

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

      .  the mortgage sale agreement to enable the purchase by Funding 2 of
         interests in the trust property;

      .  the mortgages trust deed (i) to establish Funding 2 as a beneficiary of
         the trust, (ii) to enable changes in Funding 2's share of the trust
         property from time to time and (iii) to regulate the distribution of
         interest and principal receipts in the trust property to Funding 2 and
         the other beneficiaries; and

      .  the cash management agreement to regulate the application of monies to
         Funding 2.

      There may be conflicts of interest between Funding and Funding 2, in which
case it is expected that the mortgages trustee would follow the directions given
by the relevant beneficiary that has the largest share of the trust property at
that time. The interests of Funding may not prevail, which may adversely affect
current noteholders' interests.

If Funding enters into new intercompany loan agreements, then the new term
advances may rank ahead of issuer term advances as to payment, and accordingly
new notes may rank ahead of Issuer Notes as to payment

      It is likely that Holdings will establish new issuers to issue new notes
to investors. The proceeds of each new issue will be used by the new issuer to
make a new intercompany loan to Funding. Funding will use the proceeds of the
new intercompany loan either to:

      .  pay the seller for new loans and their related security to be assigned
         to Trustees;

      .  pay the seller for a part of the seller's share of the trust property
         to be assigned to Funding;

      .  refinance an intercompany loan or intercompany loans outstanding at
         that time (and if the Issuer's intercompany loan to Funding is
         refinanced, noteholders could be repaid early); or

      .  deposit some of those proceeds in one or more of the reserve funds.

      The order in which Funding pays principal and interest to the Issuer on
the issuer term advances and to any new issuer on the new term advances will
depend primarily on the designated ratings of those term advances. In general,
the term advances with the highest term advance rating will be paid ahead of
lower rated term advances, subject to their relative scheduled repayment dates.
For example, Funding will pay interest due on the issuer term AAA advances
proportionally and equally with the interest due on any new term AAA advances
and ahead of payments of interest due on any term advance with a lower term
advance rating than AAA (including, for the avoidance of doubt, any issuer term
AA advance and any issuer term BBB advance). Similarly, Funding will, in
general, repay principal amounts due on the issuer term advances and any new
term advances in accordance with their respective term advance ratings, subject
to their relative scheduled repayment dates. For example, principal repayments
due on an issuer term AAA advance generally will be made before principal
repayments due on a new term AA advance. This principle is subject to a number
of exceptions, however, which are designed primarily to provide some protection
that scheduled repayments of principal on the issuer term advances will not
materially affect payments of principal on the previous term advances and in
turn would not be materially affected by payments of principal on any new term
advances. Exceptions also apply to the term BB advances made by Holmes Financing
(No. 4) PLC.

      The term advance ratings designated to the issuer term advances on the
closing date will not change even if the ratings assigned to the corresponding
classes of Issuer Notes change.

                                        7

<PAGE>

      The current payment and security priorities of the Issuer Notes relative
to each other as set out in the Issuer deed of charge and the Issuer cash
management agreement will not change as a result of an issue of new notes by a
new issuer, because that new issue will be separately documented. However,
Funding may be required to repay new issuer amounts owing under a new term
advance ahead of or in the same order of priority as amounts owing to the Issuer
on the issuer term advances, depending on the term advance rating, the scheduled
repayment date of that new term advance and certain other rules regarding the
repayment of principal by Funding. If this is the case, then the relevant new
noteholders will be paid before the relevant current noteholders.

Funding has entered into other intercompany loan agreements with the other
issuers, and certain of the term advances in those other intercompany loans rank
ahead of certain of the issuer term advances in the issuer intercompany loan as
to payment, and accordingly some of the Issuer Notes issued by the other issuers
rank ahead of certain of the Issuer Notes as to payment

      The other issuers issued notes to investors, the proceeds of which were
used by the other issuers to make other intercompany loans to Funding. Funding
used the proceeds of the intercompany loan from the Issuer to pay the seller for
loans and their related security assigned to Trustees which comprised its
original share of the trust property. Funding used the proceeds of the other
intercompany loans to pay the seller for the acquisition of additional parts of
the seller's share of the trust property or to pay the seller for loans and
their related security assigned to Trustees which constituted an addition to
Funding's already existing share of the trust property.

      The order in which Funding pays principal and interest to the Issuer on
the issuer term advances and to the other issuers on the other term advances
under the other intercompany loans depends primarily on the designated ratings
of those term advances. In general, term advances with the highest term advance
rating will be paid ahead of lower rated term advances subject to their relative
scheduled repayment dates. For example, Funding will pay interest due on the
issuer term AAA advances proportionally and equally with the interest due on any
subsequent term AAA advances and ahead of payments of interest due on any term
advance with a lower term advance rating than AAA (including, for the avoidance
of doubt, any term AA advance, term BBB advance or term BB advance). Similarly,
Funding will, in general, repay principal amounts due on the issuer term
advances and the term advances under the other intercompany loans in accordance
with their respective term advance ratings. For example, principal repayments
due on an issuer term AAA advance generally will be made before principal
repayments due on a subsequent term AA advance. This principle is subject to a
number of exceptions, however, which are designed primarily to provide some
protection that scheduled repayments of principal on the issuer term advances
will not materially affect payments of principal on the previous term advances
and on new term advances and in turn would not be materially affected by
payments of principal on the previous term advances and any new term advances.
Exceptions also apply to the repayment of principal on the term BB advance made
by Holmes Financing (No. 4) PLC, which is not repaid out of Funding principal
receipts.

      The term advance ratings designated to the term advances under the other
intercompany loans on the previous closing dates will not change even if the
ratings assigned to the corresponding classes of other notes change.

      The current payment and security priorities of the Issuer Notes relative
to each other as set out in the Issuer deed of charge and the Issuer cash
management agreement are not affected as a result of the issues of further
Issuer Notes by the other issuers, because the other issues were separately
documented. However, Funding may be required to repay to the other issuers
amounts which are owing under one or more other term advances ahead of or in the
same order of priority as amounts owing to the Issuer on the issuer term
advances, depending on the term advance rating, the scheduled repayment date of
that previous term advance and other rules regarding the repayment of principal
by Funding.

                                        8

<PAGE>

New issuers and new start-up loan providers will share in the same security
granted by Funding to the Issuer, and this may adversely affect payments on the
Issuer Notes

      If Funding enters into a new intercompany loan agreement, then if required
it will also enter into a new start-up loan agreement with a new start-up loan
provider and the security trustee. If required by the rating agencies, Funding
will use part of the proceeds of the new start-up loan to fund further one or
both of the existing reserve funds.

      The new issuer and any new start-up loan provider will become party to the
Funding deed of charge and will be entitled to share in the security granted by
Funding for its benefit (and the benefit of the other Funding secured creditors)
under the Funding deed of charge. In addition, the liabilities owed to the
Funding liquidity facility provider and the Funding swap provider which are
secured by the Funding deed of charge may increase each time that Funding enters
into a new intercompany loan agreement. This could ultimately cause a reduction
in the payments noteholders receive on their Issuer Notes.

The other issuers, the Funding swap provider and the other start-up loan
providers already share in the security granted by Funding to the Issuer, which
may adversely affect payments on the Issuer Notes

      Funding has entered into the other intercompany loan agreements and it
also entered into five start-up loan agreements with the start-up loan provider
and the security trustee. Funding used part of the proceeds of these start-up
loans to fund the first reserve fund.

      The other issuers and the start-up loan provider are already party to the
Funding deed of charge and are entitled to share in the security granted by
Funding for the benefit of the Funding secured creditors (including, as from the
closing date, the Issuer under the Funding deed of charge). In addtion, the
liabilities owed to the Funding liquidity facility provider and the Funding swap
provider which are secured by the Funding deed of charge may increase each time
that Funding enters into a new intercompany loan agreement. These factors could
ultimately cause a reduction in the payments noteholders receive on their Issuer
Notes.

There may be conflicts between the Issuer, the other issuers and any new
issuers, and the Issuer's interests may not prevail which may adversely affect
payments on the Issuer Notes

      The security trustee will exercise its rights under the Funding deed of
charge only in accordance with directions given by the issuers (which could be
one or more of the Issuer, the other issuers and, if Funding enters into new
intercompany loans, any new issuer) that have the highest-ranking outstanding
term advances, provided that the security trustee is indemnified to its
satisfaction.

      If the security trustee receives conflicting directions, it will follow
the directions given by the relevant issuers representing the largest principal
amount outstanding of relevant term advances. If the Issuer is not in the group
representing that largest principal amount, then its interests may not prevail.
This could ultimately cause a reduction in the payments noteholders receive on
their Issuer Notes.

As new loans are assigned to Trustees, the characteristics of the trust property
may change from those existing at the closing date, and those changes may
adversely affect payments on the Issuer Notes

      There is no guarantee that any new loans assigned to Trustees will have
the same characteristics as the loans in the portfolio as at the closing date.
In particular, new loans may have different payment characteristics than the
loans in the portfolio as at the closing date. The ultimate effect of this could
be to delay or reduce the payments noteholders receive on the Issuer Notes.
However, new loans will be required to meet certain criteria. These criteria may
be modified after the closing date and noteholders' consent to such
modifications will not be obtained provided that the security trustee is
satisfied that the then current ratings of the Issuer Notes will not be
adversely affected by the proposed modifications.

                                        9

<PAGE>

The yield to maturity of the Issuer Notes may be adversely affected by
prepayments or redemptions on the loans

      The yield to maturity of the Issuer Notes of each class will depend mostly
on (a) the amount and timing of payment of principal on the loans and (b) the
price paid by the noteholders of each class of Issuer Notes. The yield to
maturity of the Issuer Notes of each class may be adversely affected by a higher
or lower than anticipated rate of prepayments on the loans.

      No assurance can be given that Funding will accumulate sufficient funds
during the cash accumulation period relating to the issuer series 1 term AAA
advances to enable it to repay these issuer term advances to the Issuer so that
the series 1 class A Issuer notes will be redeemed in their entirety on their
scheduled redemption dates. In addition, no assurance can be given that Funding
will receive sufficient funds from its share in Trustees on a single interest
payment date to enable it to repay the relevant scheduled amortisation amount in
respect of the issuer series 2 term AAA advance or the issuer series 3A1 term
AAA advance to the Issuer so that the series 2 class A Issuer Notes and series
3A1 class A Issuer Notes, respectively, will be redeemed on their scheduled
redemption dates.

      During the cash accumulation period for any issuer term AAA advance, no
repayments of principal will be made on the issuer term AA advances or the
issuer term BBB advances. This means that there will be no corresponding
repayments of principal on the class B Issuer Notes or the class C Issuer Notes.

      The extent to which sufficient funds are saved by Funding during a cash
accumulation period or a scheduled amortisation period or received by it from
its share in the mortgages trust on a scheduled repayment date will depend on
whether the actual principal prepayment rate of the loans is the same as the
assumed principal prepayment rate. If Funding is not able to save enough money
during a cash accumulation period or a scheduled amortisation period, or does
not receive enough money from its share in the mortgages trust on a scheduled
repayment date, to repay the relevant issuer term AAA advance (and if it is
unable to make a drawing on the Funding liquidity facility or the first reserve
fund to make good the shortfall) so that the Issuer can redeem the class A
Issuer Notes of the corresponding series on their respective scheduled
redemption date(s), then Funding will be required to pay to the Issuer on those
scheduled redemption dates only the amount that it has actually saved or
received. Any shortfall will be deferred and paid on subsequent interest payment
dates when Funding has money available to make the payment. In these
circumstances, unless the Issuer is able to make a drawing on the issuer
liquidity facility, there will be a variation in the yield to maturity of the
relevant class of Issuer Notes.

The Issuer's ability to redeem the class A Issuer Notes in full on their
scheduled redemption dates is affected by the rate of prepayment on the loans

      The rate of prepayment of loans is influenced by a wide variety of
economic, social and other factors, including prevailing mortgage market
interest rates, the availability of alternative financing programs, local and
regional economic conditions and homeowner mobility. For instance, prepayments
on the loans may be due to borrowers refinancing their loans and sales of
properties by borrowers (either voluntarily or as a result of enforcement action
taken). In addition, if the seller is required to repurchase a loan or loans
under a mortgage account and their related security because, for example, one of
the loans does not comply with the loan warranties in the mortgage sale
agreement, then the payment received by Trustees will have the same effect as a
prepayment of all of the loans under the mortgage account. Because these factors
are not within its control or the control of Funding or Trustees, the Issuer
cannot give any assurances as to the level of prepayments that the portfolio may
experience.

      Variation in the rate of prepayments of principal on the loans may affect
each class of Issuer Notes differently depending upon amounts already repaid by
Funding to the Issuer under the issuer intercompany loan and whether a trigger
event has occurred, or a loan is subject to a product switch or a further
advance or the security granted by the Issuer under the Issuer deed of charge
has been enforced. If prepayments on the loans occur less frequently than
anticipated, then there may not be sufficient funds available to redeem the
class A Issuer Notes in full on their respective scheduled redemption dates.

                                       10

<PAGE>

The seller may change the lending criteria relating to loans which are
subsequently assigned to Trustees which could affect the characteristics of the
trust property and which may adversely affect payments on the Issuer Notes

     Each of the loans was originated in accordance with the seller's lending
criteria at the time of origination. These lending criteria consider a variety
of factors such as a potential borrower's credit history, employment history and
status and repayment ability, as well as the value of the property to be
mortgaged. In the event of the assignment of any new loans and new related
security to Trustees, the seller will warrant that those new loans and new
related security were originated in accordance with the seller's lending
criteria at the time of their origination. However, the seller retains the right
to revise its lending criteria as determined from time to time, and so the
lending criteria applicable to any loan at the time of its origination may not
be or have been the same as those when other loans were originated. If new loans
that have been originated under revised lending criteria are assigned to
Trustees, the characteristics of the trust property could change. This could
lead to a delay or a reduction in the payments received on the Issuer Notes.

The seller has introduced new procedures relating to investigations and searches
for remortgages which could affect the characteristics of the trust property and
which may adversely affect payments on the Issuer Notes

     The seller no longer requires a solicitor or licensed or qualified
conveyancer to conduct a full investigation of the title to a property in all
cases. Where the borrower is remortgaging there will be a more limited form of
investigation of title for properties located in England and Wales and
confirming such other matters as are required by a reasonable, prudent mortgage
lender. Properties which have undergone such a limited investigation may be
subject to matters which would have been revealed by a full investigation of
title and which may have been remedied or, if incapable of remedy, may have
resulted in the properties not being accepted as security for a loan had such
matters been revealed. The introduction of loans secured by such properties into
the trust property could result in a change of the characteristics of the trust
property. This could lead to a delay or a reduction in the payments received on
the Issuer Notes.

The timing and amount of payments on the loans could be affected by various
factors which may adversely affect payments on the Issuer Notes

     The loans are affected by credit, liquidity and interest rate risks.
Various factors influence mortgage delinquency rates, prepayment rates,
repossession frequency and the ultimate payment of interest and principal, such
as changes in the national or international economic climate, regional economic
or housing conditions, changes in tax laws, interest rates, inflation, the
availability of financing, yields on alternative investments, political
developments and government policies. Other factors in borrowers' individual,
personal or financial circumstances may affect the ability of borrowers to repay
loans. Loss of earnings, illness, divorce and other similar factors may lead to
an increase in delinquencies by and bankruptcies of borrowers, and could
ultimately have an adverse impact on the ability of borrowers to repay loans.

     In addition, the ability of a borrower to sell a property given as security
for a loan at a price sufficient to repay the amounts outstanding under the loan
will depend upon a number of factors, including the availability of buyers for
that property, the value of that property and property values in general at the
time.

     The principal source of income for repayment of the Issuer Notes by the
Issuer is the issuer intercompany loan. The principal source of income for
repayment by Funding of the issuer intercompany loan is its interest in the
loans held on trust by Trustees for Funding and the seller. If the timing and
payment of the loans is adversely affected by any of the risks described above,
the payments on the Issuer Notes could be reduced or delayed.

                                       11

<PAGE>

The occurrence of trigger events and enforcement of the Issuer security may
adversely affect the timing of the scheduled redemption of the series 1 class A
Issuer Notes, the series 2 class A Issuer Notes and/or series 3 class A1 Issuer
Notes

     If no trigger event has occurred and the Issuer security has not been
enforced, then payments of principal will not occur on the class A Issuer Notes
of each series before their respective scheduled redemption dates.

     If a trigger event occurs or the Issuer security is enforced prior to the
scheduled redemption dates for the class A Issuer Notes of each series, then the
relevant classes of Issuer Notes outstanding will not be repaid on their
scheduled redemption dates but will be repaid on each interest payment date from
monies received from Funding on the issuer term AAA advances of the
corresponding series as described in the following three risk factors.

If an asset trigger event occurs, any series 1 class A Issuer Notes, series 2
class A Issuer Notes and/or series 3 class A1 Issuer Notes then outstanding will
not be repaid on their scheduled redemption dates

     When an asset trigger event has occurred, Trustees will distribute
principal receipts on the loans to Funding and the seller proportionally and
equally based on their percentage shares of the trust property (that is, the
Funding share percentage and the seller share percentage). When an asset trigger
event has occurred, Funding will repay:

     first, the issuer term AAA advances and the other term AAA advances of each
     series proportionally and equally, until all of those term AAA term
     advances are fully repaid;

     second, the issuer term AA advances and the other term AA advances of each
     series proportionally and equally, until all of those term AA term advances
     are fully repaid; and

     third, the issuer term BBB advances and the other term BBB advances of each
     series proportionally and equally, until all of those term BBB term
     advances are fully repaid.

     This order of priority of payments may change if Funding enters into new
intercompany loan agreements. If an asset trigger event occurs, any series 1
class A Issuer Notes, series 2 class A Issuer Notes and/or series 3 class Al
Issuer Notes then outstanding will not be repaid on their scheduled redemption
dates, and there is also a risk that they will not be repaid by their final
maturity dates.

If a non-asset trigger event occurs, any series 1 class A Issuer Notes, series 2
class A Issuer Notes and/or series 3 class A1 Issuer Notes then outstanding will
not be repaid on their scheduled redemption dates

       If a non-asset trigger event has occurred, the mortgages trustee will
distribute all principal receipts to Funding until the Funding share percentage
of the trust property is zero. When a non-asset trigger event has occurred,
Funding will repay:

       first, the issuer series 1 term AAA advance until that issuer series 1
term AAA advance is fully repaid;

       then, the previous series 1 term AAA advance made by Holmes Financing
(No.2) PLC until that previous series 1 term AAA advance is fully repaid;

       then, the previous series 1 term AAA advance made by Holmes Financing
(No.3) PLC until that previous series 1 term AAA advance is fully repaid;

       then, the previous series 1 term AAA advance made by Holmes Financing
(No.1) PLC until that previous series 1 term AAA advance is fully repaid;

       then, in no order of priority between them but in proportion to the
respective amounts due, the

                                       12

<PAGE>

issuer series 2A1 term AAA advance and the issuer series 2A2 term AAA advance
until both of those issuer series 2 term AAA advances are fully repaid;

       then, the previous series 2 term AAA advance made by Holmes Financing
(No.3) PLC until that previous series 2 term AAA advance is fully repaid;

       then, the previous series 2 term AAA advance made by Holmes Financing
(No.1) PLC until that previous series 2 term AAA advance is fully repaid;

       then, the previous series 2 term AAA advance made by Holmes Financing
(No.4) PLC until the previous series 2 term AAA advance is fully repaid;

       then, the issuer series 3A1 term AAA advance until the issuer series 3A1
term AAA advance is fully repaid;

       then, the previous series 4 term AAA advance made by Holmes Financing
(No.4) PLC until the previous series 4 term AAA advance is fully repaid;

       then, the previous series 3 term AAA advance made by Holmes Financing
(No.1) PLC until that previous series 3 term AAA advance is fully repaid;

       then, the previous series 4 term AAA advance made by Holmes Financing
(No.1) PLC until that previous series 4 term AAA advance is fully repaid;

       then, the previous series 1 term AAA advance made by Holmes Financing
(No.4) PLC until the previous series 1 term AAA advance is fully repaid;

       then, the previous series 2 term AAA advance made by Holmes Financing
(No.2) PLC until that previous series 2 term AAA advance is fully repaid;

       then, the previous series 3 term AAA advance made by Holmes Financing
(No.2) PLC until that previous series 3 term AAA advance is fully repaid;

       then, in no order of priority between them but in proportion to the
respective amounts due, the previous series 4 term AAA advance made by Holmes
Financing (No.2) PLC, the previous series 3 term AAA advance made by Holmes
Financing (No.3) PLC, the previous series 3 term AAA advance made by Holmes
Financing (No.4) PLC and the issuer series 3A2 term AAA advance until all of
those term AAA advances are fully repaid;

       then, the issuer term AA advances and the previous term AA advances, in
no order of priority between them but in proportion to the respective amounts
due, until all of those term AA advances are fully repaid; and

       finally, the issuer term BBB advances and the previous term BBB advances,
in no order of priority between them but in proportion to the respective amounts
due, until all of those term BBB advances are fully repaid.

     This order of priority of payments will change if Funding enters into new
intercompany loan agreements. If a non-asset trigger event occurs, any series 1
class A Issuer Notes, series 2 class A Issuer Notes and/or series 3 class Al
Issuer Notes then outstanding will not be repaid on their scheduled redemption
dates.

                                       13

<PAGE>

If the issuer security is enforced, any series 1 class A Issuer Notes, series 2
class A Issuer Notes and/or series 3 class A Issuer Notes then outstanding will
not be repaid on their scheduled redemption dates

     If the Issuer security is enforced, then Trustees will distribute funds as
required under the terms of the transaction agreements. In these circumstances,
any series 1 class A Issuer Notes, series 2 class A Issuer Notes and/or series 3
class A Issuer Notes then outstanding will not be repaid on their scheduled
redemption dates and there is also a risk that those class A Issuer Notes may
not be repaid by their final maturity dates.

Loans subject to product switches and further advances will be repurchased by
the seller from Trustees, which will affect the prepayment rate of the loans,
and this may affect the yield to maturity of the Issuer Notes

     If a loan is subject to a product switch or a further advance, then the
seller will be required to repurchase the loan or loans under the relevant
mortgage account and their related security from Trustees at a price equal to
the outstanding principal balance of those loans together with any arrears of
interest and accrued and unpaid interest and expenses to the date of purchase.

     A loan will be subject to a product switch if the borrower and the seller
agree on or the servicer offers a variation in the financial terms and
conditions applicable to the relevant borrower's loan, other than:

     .  any variation agreed with a borrower to control or manage arrears on the
        loan;

     .  any variation in the maturity date of the loan unless any intercompany
        loan outstanding is extended beyond 2038;

     .  any variation imposed by statute;

     .  any variation of the rate of interest payable in respect of the loan
        where that rate is offered to the borrowers of more than 10 per cent. by
        outstanding principal amount of loans comprised in the trust property in
        any interest period; or

     .  any variation in the frequency with which the interest payable in
        respect of the loan is applied.

     A loan will be subject to a further advance if an existing borrower
requests a further amount to be lent to him or her under the mortgage in
circumstances where the seller has a discretion to, and does, grant that
request. A drawing under a flexible loan will not constitute a further advance.

     The yield to maturity of the Issuer Notes may be affected by the repurchase
of loans subject to product switches and further advances.

Ratings assigned to the Issuer Notes may be lowered or withdrawn after
noteholders purchase the Issuer Notes, which may lower the market value of the
Issuer Notes

     The ratings assigned to each class of Issuer Notes address the likelihood
of full and timely payment to noteholders of all payments of interest on each
interest payment date under those classes of Issuer Notes. The ratings also
address the likelihood of (in the case of Standard & Poor's and Fitch) "timely",
or (in the case of Moody's) "ultimate", payment of principal on the final
maturity date of each class of Issuer Notes. Any rating agency may lower its
rating or withdraw its rating if, in the sole judgment of the rating agency, the
credit quality of the Issuer Notes has declined or is in question. 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 the ratings assigned to each class of Issuer Notes will not
affect the term advance ratings assigned to each issuer term advance under the
issuer intercompany loan.

                                       14

<PAGE>

Subordination of other note classes may not protect noteholders from all risk of
loss

     The class B Issuer Notes and class C Issuer Notes are subordinated in right
of payment of interest to the class A Issuer Notes. The class C Issuer Notes are
subordinated in right of payment of interest to the class B Issuer Notes.

       However, as described in "The transaction has been structured in the
expectation that the series 1 Issuer Notes will be redeemed before the series 2
Issuer Notes", the transaction has been structured in the expectation that the
series 1 Issuer Notes will be repaid in full prior to the redemption of the
series 2 class A Issuer Notes and the series 3 class A Issuer Notes.

     There is no assurance that these subordination rules will protect the
holders of class A Issuer Notes from all risk of loss or the holders of class B
Issuer Notes from all risk of loss.

Principal payments on the class B Issuer Notes and the class C Issuer Notes will
be deferred in some circumstances

       Principal repayments on the issuer term AA advances and/or the issuer
term BBB advances will be deferred in the following circumstances:

       .  if a principal loss has been recorded on the principal deficiency
          ledger in respect of any term AA advances or any term BBB advances; or

       .  if the first reserve fund has been debited on or prior to the relevant
          interest payment date for the purposes of curing a principal
          deficiency in respect of any term AA advances or any term BBB advances
          and the first reserve fund has not been replenished by a corresponding
          amount on the relevant interest payment date; or

       .  if, as at the relevant interest payment date, the total outstanding
          principal balance of loans in the mortgages trust, in respect of which
          the aggregate amount in arrear is more than three times the monthly
          payment then due, is more than five per cent. of the total outstanding
          principal balance of loans in the mortgages trust.

       In these circumstances, the issuer term BBB advances and, as applicable,
the issuer term AA advances will not be entitled to principal repayments until
the relevant circumstance as described in this risk factor has been remedied (if
ever).

       This means that payments of principal on the class C Issuer Notes of all
series and, as applicable, the class B Issuer Notes of all series, will be
deferred until the earlier of the time when the relevant circumstance described
in this risk factor has been remedied (if ever) and the maturity date of the
relevant Issuer Notes.

Series 2 Issuer Notes and series 3 Issuer Notes may be subject to risk if the
trust property deteriorates after repayment of the series 1 Issuer Notes

       If the loans comprising the trust property do not perform as expected at
any time after the repayment in full of the series 1 Issuer Notes, then the
series 2 Issuer Notes and/or the series 3 Issuer Notes may not be repaid in
full.

       In addition, if the issuer does not exercise its option to redeem the
Issuer Notes (other than the series 1 class A Issuer Notes and the series 2
class A Issuer Notes) on the interest payment date falling in October 2006, then
the transaction has been structured in the expectation that the series 3 class
Al Issuer Notes will be repaid in full before the series 3 class A2 Issuer
Notes. In this case, if the loans comprising the trust property do not perform
as expected at any time after the repayment in full of the series 3 class Al
Issuer Notes, then the series 3 class A2 Issuer Notes may not be repaid in full.

                                       15

<PAGE>

     This risk will not affect the series 1 noteholders.

If we fail to make timely payments of amounts due under an issuer dollar
currency swap, then noteholders may be subject to exchange rate risks on the
series 1 Issuer Notes and some of the series 2 Issuer Notes

     Investors will pay for the series 1 Issuer Notes, the series 3 class A2
Issuer Notes, the series 3 class B Issuer Notes and the series 3 class C Issuer
Notes in US dollars, but the issuer term advances to be made by the Issuer to
Funding and repayments of principal and payments of interest by Funding to the
Issuer under the issuer intercompany loan will be in sterling.

     To hedge its currency exchange rate exposure, including the interest rate
exposure connected with that currency exposure, on the closing date the Issuer
will enter into the issuer dollar currency swaps for series 1 Issuer Notes, the
series 2 class A Issuer Notes, the series 2 class B Issuer Notes and the series
2 class C Issuer Notes with the issuer dollar currency swap providers.

     If the Issuer fails to make timely payments of amounts due under an issuer
dollar currency swap, then the Issuer will have defaulted under that issuer
currency swap. The issuer dollar currency swap providers are obliged only to
make payments under the issuer dollar currency swaps as long as the Issuer make
payments under them. If the issuer dollar currency swap providers are not
obliged to make payments, or if an issuer dollar currency swap provider defaults
in its obligations to make payments, of amounts in US dollars equal to the full
amount to be paid by that issuer dollar currency swap provider on the payment
dates under the relevant issuer dollar currency swap (which are the same dates
as the interest payment dates), the Issuer will be exposed to changes in US
dollar/sterling currency exchange rates and in the associated interest rates on
these currencies. Unless a replacement issuer dollar currency swap is entered
into, the Issuer may have insufficient funds to make payments due on the Issuer
Notes of any class and any series.

If the mortgages trustee GIC provider or the Funding GIC provider ceases to
satisfy certain criteria to provide the mortgages trustee GIC account or the
Funding GIC account would need to be transferred to another entity which does
satisfy that criteria

     The mortgages trustee GIC provider and the Funding GIC provider are
required to satisfy certain criteria (including certain criteria and/or
permissions set or required by the Financial Services Authority, or FSA, from
time to time) in order to continue to receive deposits in the mortgages trustee
GIC account and the Funding GIC account respectively. If either the mortgages
trustee GIC provider or the Funding GIC provider ceases to satisfy that
criteria, then the relevant account would need to be transferred to another
entity which does satisfy that criteria. In these circumstances the new GIC
provider may not offer a GIC on terms as favourable as those provided by the
mortgages trustee GIC provider or the Funding GIC provider.

The difference in timing between the Issuer's obligations and the obligations of
the series 2 class A2 issuer Swiss franc currency swap provider and the series 3
class Al issuer euro currency swap provider could adversely affect payments on
the Issuer Notes

       On each interest payment date and to the extent that it has funds
available, Funding will pay to the Issuer interest and, as applicable, principal
due on the issuer series 2A2 term AAA advance and the issuer series 3A1 term AAA
advance. On each interest payment date in relation to the Issuer's obligations
under the issuer Swiss franc currency swap in relation to the series 2 class A2
Issuer Notes and the issuer euro currency swap in relation to the series 3 class
Al Issuer Notes the Issuer will pay the interest received from Funding to, as
applicable, the series 2 class A2 issuer Swiss franc currency swap provider and
the series 3 class Al issuer euro currency swap provider. Each of these issuer
currency swap providers will not be obliged to make any corresponding swap
payments to the Issuer for up to twelve months until amounts are due from the
relevant issuer currency swap provider on the interest payment date in respect
of the series 2 class A2 Issuer Notes or the series 3 class Al Issuer Notes, as
applicable. These interest payment dates occur annually up to and including the
earliest of (i) the interest payment dates falling in October 2004 and October
2006, respectively, (ii) the

                                       16

<PAGE>

occurrence of a trigger event or (iii) enforcement of the issuer security, and
quarterly on and following the interest payment date occurring immediately
thereafter.

     If the series 2 class A2 issuer Swiss franc currency swap provider and/or
the series 3 class Al issuer euro currency swap provider does not meet its
payment obligations to the Issuer under the relevant issuer currency swap on any
annual interest payment date and the relevant issuer currency swap provider does
not make a termination payment that has become due from it to the Issuer, the
Issuer may have a larger shortfall in funds with which to make interest payments
on the Issuer Notes than if its payment obligations were quarterly and therefore
coincidental with the Issuer's payment obligations under those issuer currency
swaps. Hence, the difference in timing between the Issuer's obligations and the
obligations of the relevant issuer currency swap providers under the issuer
Swiss franc currency swap and the issuer euro currency swap in respect of the
series 3 class Al Issuer Notes may affect the Issuer's ability to make payments
on the Issuer Notes of any class and any series.

Termination payments on the issuer dollar currency swaps, the issuer Swiss franc
currency swap or the issuer euro currency swap may adversely affect the funds
available to make payments on the Issuer Notes

       If any of the issuer dollar currency swaps, the issuer Swiss franc
currency swap or the issuer euro currency swap terminates, the Issuer may as a
result be obliged to pay a termination payment to the relevant issuer dollar
currency swap provider, the issuer Swiss franc currency swap provider or the
issuer euro currency swap provider, as the case may be. The amount of the
termination payment will be based on the cost of entering into a replacement
issuer dollar currency swap, issuer Swiss franc currency swap or issuer euro
currency swap, as the case may be. Under the Intercompany Loan Agreement,
Funding will be required to pay the Issuer an amount equal to any termination
payment due from the Issuer to the relevant issuer dollar currency swap
provider, the issuer Swiss franc currency swap provider or the issuer euro
currency swap provider, as the case may be. Funding will also be obliged to pay
the Issuer any extra amounts which the Issuer may be required to pay to enter
into a replacement swap.

       The Issuer and Funding cannot give noteholders any assurance that Funding
will have the funds available to make that payment or that the Issuer will have
sufficient funds available to make any termination payment under any of its
issuer currency swaps or to make subsequent payments to noteholders in respect
of the relevant series and class of Issuer Notes. Nor can the Issuer give
noteholders any assurance that it will be able to enter into a replacement swap,
or if one is entered into, that the credit rating of the replacement issuer
dollar currency swap provider, issuer Swiss franc currency swap provider or
issuer euro currency swap provider, as the case may be, will be sufficiently
high to prevent a downgrading of the then current ratings of the Issuer Notes by
the rating agencies.

       Except where the relevant issuer dollar currency swap provider, the
issuer Swiss franc currency swap provider or the issuer euro currency swap
provider, as the case may be, has caused the relevant issuer dollar currency
swap, the issuer Swiss franc swap or the relevant issuer euro currency swap, as
applicable, to terminate by its own default, any termination payment due from
the Issuer will rank equally not only with payments due to the holders of the
series and class of Issuer Notes to which the relevant swap relates but also
with payments due to the holders of any other series and class of Issuer Notes
which rank equally with the series and class of Issuer Notes to which the
relevant swap relates. Any additional amounts required to be paid by the Issuer
following termination of the relevant issuer dollar currency swap, the issuer
Swiss franc swap or the relevant issuer euro currency swap, as the case may be
(including any extra costs incurred (for example, from entering into "spot"
currency or interest rate swaps) if the Issuer cannot immediately enter into a
replacement swap), will also rank equally not only with payments due to the
holders of the series and class of Issuer Notes to which the relevant issuer
currency swap relates but also with payments due to the holder of any other
series and class of Issuer Notes which rank equally with the series and class of
Issuer Notes to which the relevant issuer currency swap relates. Furthermore,
any termination payment or additional payment or additional amounts required to
be paid by the Issuer following termination of an issuer currency swap will rank
ahead of payments due to the holders of any series and class of Issuer Notes
which ranks

                                       17

<PAGE>

below the series and class of Issuer Notes to which the relevant issuer currency
swap relates. Therefore, if the Issuer is obliged to make a termination payment
to the relevant issuer dollar currency swap provider and/or the issuer Swiss
franc currency swap provider and/or the issuer euro currency swap provider, as
the case may be, or to pay any other additional amount as a result of the
termination of the relevant issuer currency swap, this may affect the funds
which the Issuer has available to make payments on the Issuer Notes of any class
and any series.

Payments by Funding to third parties in relation to the other issuers may affect
payments due to the Issuer and accordingly its ability to make payments on the
Issuer Notes

     Under the other intercompany loan agreements, Funding is required to make
payments to the other issuers in respect of the other issuers' obligations to
make payments to their respective own security trustee, note trustee, agent
bank, paying agents, liquidity facility provider, cash manager, corporate
services provider and account bank and to other third parties to whom the other
issuers owe money. These payments rank in priority to amounts due by Funding to
the Issuer on the issuer term advances.

     Funding's obligations to make the payments described above to the other
issuers may affect Funding's ability to make payments to the Issuer under the
issuer intercompany loan. This in turn may affect its ability to make payments
on the Issuer Notes.

The Issuer relies on third parties and noteholders may be adversely affected if
they fail to perform their obligations

     The Issuer is a party to contracts with a number of other third parties
that have agreed to perform services in relation to the Issuer Notes. For
example, the issuer liquidity facility provider has agreed to provide it with
the issuer liquidity facility and the issuer dollar currency swap providers, the
issuer Swiss franc currency swap provider and the issuer euro currency swap
provider have agreed to provide their swaps, the corporate services provider has
agreed to provide corporate services and the paying agents and the agent bank
have agreed to provide payment and calculation services in connection with the
Issuer Notes. In the event that any of these parties were to fail to perform
their obligations under the respective agreements to which they are a party,
noteholders may be adversely affected.

The Issuer may be unable to pay, in full or at all, interest due on the Issuer
Notes if there is an income or principal deficiency

     If, on any interest payment date, revenue receipts available to Funding
(including the reserve funds) are insufficient to enable Funding to pay interest
on any of the other term advances, issuer term advances and any new term
advances and other expenses of Funding ranking higher in seniority to interest
due on such term advances, then Funding may use principal receipts on the loans
received by it in the mortgages trust to make up the shortfall.

     Funding will use principal receipts that would have been applied to repay
the term advances with the lowest term advance rating to pay interest on those
other term advances and senior expenses described in the preceding paragraph
where there is a shortfall of monies to pay those amounts. At the closing date,
the term advances with the lowest term advance rating include the issuer term
BBB advances. As a result of using principal to repay interest and senior
expenses in this manner, there will be less principal available to repay the
issuer term BBB advances.

     Funding will be obliged to keep a ledger that records any principal applied
to pay interest and senior expenses. When the amount recorded on the ledger is
equal to the principal amount outstanding of the term BBB advances, then Funding
will use principal receipts that would have been applied to repay the term
advance with the next lowest ranking term advance rating to pay interest on the
term advances and senior expenses where there is a shortfall of money to pay
those amounts. At the closing date, the term advances with the next lowest term
advance rating include the issuer term AA advances. When the amount recorded on
the principal deficiency ledger exceeds the principal amount outstanding on the
term AA advances, Funding will use principal receipts that would have been
applied to repay the term AAA advances to pay those amounts.

                                       18

<PAGE>

       During the term of the transaction, however, it is expected that any
principal deficiencies will be recouped from subsequent excess revenue receipts
and amounts standing to the credit of the first reserve fund. The revenue
receipts and the first reserve fund monies will be applied first to cover any
principal deficiency in respect of the term advances with the highest term
advance rating (at the closing date, these include the issuer term AAA
advances), and then the term advances with the next highest ranking term advance
rating (at the closing date, these include the issuer term AA advances), and so
on down to the term advances with the lowest term advance rating.

       If there are insufficient funds available because of such income or
principal deficiencies, then one or more of the following consequences may
occur:

       .  the interest and other net income of Funding may not be sufficient,
          after making the payments to be made in priority, to pay, in full or
          at all, interest due on the issuer term BBB advances and the issuer
          term AA advances;

       .  there may be insufficient funds to repay any of the issuer term BBB
          advances and the issuer term AA advances prior to their final
          repayment dates unless the other net income of Funding is sufficient,
          after making other prior ranking payments, to reduce any principal
          deficiency in respect of the term BBB advances and term AA advances;

       .  if the amount of principal deficiencies exceeds the principal amount
          outstanding of any of the term advances (and the principal
          deficiencies cannot be covered by the other income of Funding), then
          the Issuer may not receive the full principal amount of any or all of
          the issuer term advances and, accordingly, noteholders may not receive
          the full face value of the class C Issuer Notes, the class B Issuer
          Notes and the class A Issuer Notes, as the case may be; and/or

       .  the Issuer may be unable to pay, in full or at all, interest due on
          Issuer Notes.

The seller share of the trust property does not provide credit enhancement for
the Issuer Notes

       Any losses from loans included in the trust property will be allocated
proportionately between Funding and the seller on each distribution date
depending on their respective shares of the trust property. The seller's share
of the trust property does not provide credit enhancement for the Funding share
of the trust property.

The Issuer will only have recourse to the seller if there is a breach of
warranty by the seller, but otherwise the seller's assets will not be available
to the Issuer as a source of funds to make payments on the Issuer Notes

       After an issuer intercompany loan enforcement notice under the issuer
intercompany loan is given, the security trustee may sell the Funding share of
the trust property. There is no assurance that a buyer would be found or that
such a sale would realize enough money to repay amounts due and payable under
the Intercompany Loan Agreement.

       The Issuer, Funding and Trustees will not have any recourse to the seller
of the loans, other than in respect of a breach of warranty or other obligation
under the mortgage sale agreement. The Issuer, Trustees, Funding and the
security trustee will not undertake any investigations, searches or other
actions on any loan or its related security and the Issuer and each of them will
rely instead on the warranties given in the mortgage sale agreement by the
seller.

       If any of the warranties made by the seller (i) in the case of each loan
in the portfolio, was materially untrue on the date such loan was assigned to
Trustees or (ii) in the case of each new loan, is materially untrue on the date
such new loan is assigned to Trustees, then the seller may be required by
Trustees to remedy the breach within twenty days of the seller becoming aware of
the same or of receipt by it of a notice from Trustees.

       If the seller fails to remedy the breach within twenty days, then
Trustees may require the seller to repurchase the loan or loans under the
relevant mortgage account and their related security together with any arrears
of interest and accrued and unpaid interest and expenses. There can be no
assurance

                                       19

<PAGE>

that the seller will have the financial resources to repurchase the loan or
loans under the relevant mortgage account and their related security. However,
if the seller does not repurchase those loans and their related security when
required, then the seller's share of the trust property will be deemed to be
reduced by an amount equal to the principal amount outstanding of those loans
together with any arrears of interest and accrued and unpaid interest and
expenses.

       Other than as described here, neither noteholders nor the Issuer will
have any recourse to the assets of the seller.

There can be no assurance that a borrower will repay principal at the end of the
term on an interest only loan, which may adversely affect repayments on the
Issuer Notes

       Each loan in the current portfolio is repayable either on a principal
repayment basis or an interest only basis. Of the loans in the portfolio as at
December 31, 2002, approximately 39.20 per cent were interest-only loans. For
interest-only loans, because the principal is repaid in a lump sum at the
maturity of the loan, the borrower is recommended to have some repayment
mechanism such as an investment plan in place to ensure that funds will be
available to repay the principal at the end of the term. However, the seller
does not take security over such repayment mechanisms. The borrower is also
recommended to take out a life insurance policy in relation to the loan but, as
with repayment mechanisms, the seller does not take security over such life
policies.

       The ability of a borrower to repay the principal on an interest-only loan
at maturity depends on such borrower's responsibility to ensure that sufficient
funds are available from an investment plan or another source, such as ISAs,
pension policies, personal equity plans or endowment policies, as well as the
financial condition of the borrower, tax laws and general economic conditions at
the time. There can be no assurance that the borrower will have the funds
required to repay the principal at the end of the term. If a borrower cannot
repay the loan and a loss occurs on the loan, then this may affect repayments of
principal on the Issuer Notes if that loss cannot be cured by amounts standing
to the credit of the first reserve fund or the application of excess Funding
available revenue receipts.

There may be risks associated with the fact that Trustees has no legal title to
the mortgages which may adversely affect payments on the Issuer Notes

       The sale by the seller to Trustees of the mortgages has taken effect, and
any such sale in the future will take effect, in equity only. This means that
legal title to the loans in the trust property remains with the seller, but
Trustees has all the other rights and benefits relating to ownership of each
loan and its related security (which rights and benefits are subject to the
trust in favour of the beneficiaries). The mortgages trustee has the right to
demand the seller to give it legal title to the loans and the related security
in certain circumstances and until then Trustees will not apply to HM Land
Registry or the Central Land Charges Registry to register or record its
equitable interest in the mortgages.

       Because Trustees has not obtained legal title to the loans or their
related security, there are risks, as follows:

       .  firstly, if the seller wrongly sold a loan to another person which has
          already been assigned to Trustees, and that person acted in good faith
          and did not have notice of the interests of Trustees or the
          beneficiaries in the loan, then she or he might obtain good title to
          the loan, free from the interests of Trustees and the beneficiaries.
          If this occurred then Trustees would not have good title to the
          affected loan and its related security and it would not be entitled to
          payments by a borrower in respect of such a loan. This may affect the
          ability of the Issuer to repay the Issuer Notes; and

       .  secondly, the rights of Trustees and the beneficiaries may be subject
          to the rights of the borrowers against the seller, such as the rights
          of set-off which occur in relation to transactions or deposits made
          between certain borrowers and the seller and the rights of borrowers
          to redeem their mortgages by repaying the loan directly to the seller.
          If these rights were exercised, Trustees may receive less money than
          anticipated from the loans, which may affect the ability of the Issuer
          to repay the Issuer Notes.

                                       20

<PAGE>

      However, if a borrower exercises any set-off rights then an amount equal
to the amount set off will reduce the total amount of the seller share of the
trust property only, and the minimum seller share has been sized in an amount
expected to cover this risk (although there is no assurance that it will).

      Once notice has been given to borrowers of the transfer of the loans and
their related security to Trustees, independent set-off rights which a borrower
has against the seller will crystallize and further rights of independent
set-off would cease to accrue from that date and no new rights of independent
set-off could be asserted following such notice. Set-off rights arising under
transaction set-off (which are set-off claims arising out of a transaction
connected with the loan) will not be affected by such notice.

Set-off risks in relation to flexible loans and delayed cashbacks may adversely
affect the funds available to the Issuer to repay the Issuer Notes

      The seller has made, and in the future may make, an equitable assignment
of the mortgages to Trustees, with legal title being retained by the seller.
Therefore, the rights of Trustees may be subject to the direct rights of the
borrowers against the seller, including rights of set-off existing prior to
notification to the borrowers of the assignment of the mortgages. Such set-off
rights may occur if the seller fails to advance to a borrower a drawing under a
flexible loan when the borrower is entitled to draw additional amounts under a
flexible loan or if the seller fails to pay to a borrower any delayed cashback
which the seller had agreed to pay to that borrower after completion of the
relevant loan.

      If the seller fails to advance the drawing or pay the delayed cashback,
then the relevant borrower may set off any damages claim arising from the
seller's breach of contract against the seller's (and, as assignee of the
mortgages, Trustees's) claim for payment of principal and/or interest under the
loan as and when it becomes due. Such set-off claims will constitute transaction
set-off as described in the immediately preceding risk factor.

      The amount of the claim in respect of a drawing will, in many cases, be
the cost to the borrower of finding an alternative source of finance: the
borrower may obtain a loan elsewhere in which case the damages would be equal to
any difference in the borrowing costs together with any consequential losses,
namely the associated costs of obtaining alternative funds (for example, legal
fees and survey fees). If the borrower is unable to obtain an alternative loan,
he or she may have a claim in respect of other losses arising from the seller's
breach of contract where there are special circumstances communicated by the
borrower to the seller at the time the mortgage was taken out.

      In respect of a delayed cashback, the claim is likely to be in an amount
equal to the amount due under the delayed cashback together with interest and
expenses and consequential losses (if any).

      A borrower may also attempt to set off against his or her mortgage
payments an amount greater than the amount of his or her damages claim. In that
case, the servicer will be entitled to take enforcement proceedings against the
borrower although the period of non-payment by the borrower is likely to
continue until a judgment is obtained.

      The exercise of set-off rights by borrowers would reduce the incoming
cashflow to Trustees during such exercise. However, the amounts set off will be
applied to reduce the seller share of the trust property only. The minimum
seller share has been sized in an amount expected to cover this risk, although
there is no assurance that it will. If the minimum seller share is not
sufficient in this respect then noteholders may not receive all amounts due on
the Issuer Notes.

If the servicer is removed, there is no guarantee that a substitute servicer
would be found, which could delay collection of payments on the loans and
ultimately could adversely affect payments on the Issuer Notes

      The seller has been appointed by Trustees and the beneficiaries as
servicer to service the loans. If the servicer breaches the terms of the
servicing agreement, then Trustees and the beneficiaries will be entitled to
terminate the appointment of the servicer and appoint a new servicer in its
place.

                                       21

<PAGE>

      There can be no assurance that a substitute servicer would be found who
would be willing and able to service the loans on the terms of the servicing
agreement. The ability of a substitute servicer fully to perform the required
services would depend, among other things, on the information, software and
records available at the time of the appointment. Any delay or inability to
appoint a substitute servicer may affect payments on the loans and hence its
ability to make payments when due on the Issuer Notes.

      The servicer has no obligation itself to advance payments that borrowers
fail to make in a timely fashion.

Funding may not receive the benefit of any claims made on the buildings
insurance which could adversely affect payments on the Issuer Notes

      No assurance can be given that Funding will always receive the benefit of
any claims made under any applicable insurance contracts. This could reduce the
principal receipts received by Funding according to the Funding share percentage
and could adversely affect its ability to redeem the Issuer Notes. Buildings
insurance is renewed annually.

Possible regulatory changes by the Office of Fair Trading, the Financial
Services Authority and any other regulatory authority may have an impact on the
seller, the Issuer, the servicer, and/or the loans and may adversely affect our
ability to make payments when due on the Issuer Notes

      In the United Kingdom, the Office of Fair Trading ("OFT") is responsible
for the issue of licences under and the superintendence of the working and the
enforcement of the Consumer Credit Act 1974, related consumer credit regulations
and other consumer protection legislation. The Office of Fair Trading may review
businesses and operations, provide guidelines to follow and take actions when
necessary with regard to the mortgage market in the United Kingdom.

      The UK's Financial Services and Markets Act 2000 ("FSMA") represents a
major overhaul of financial services regulation in the United Kingdom and brings
a wide range of financial activities under a single regime of statutory-based
regulation. FSMA will be brought into effect in stages. The first stage (known
as "N2") came into effect on December 1, 2001. The mortgage regulation will come
into effect at a later stage (known as "N3") currently expected to be in October
2004.

      FSMA applies to any "regulated activity". H.M. Treasury has made the
Financial Services and Markets Act (Regulated Activities) Order 2001, specifying
that entering into and (in certain circumstances) administering a "regulated
mortgage contract" are regulated activities. In August 2002, H.M. Treasury
published its final draft Financial Services and Markets Act 2000 (Regulated
Activities) (Amendment) Order, specifying that arranging and advising on a
regulated mortgage contract are also to be regulated activities.

      The main effects will be that each entity carrying on a regulated activity
will be required to hold authorisation and permission from the FSA to carry on
that activity. Generally, each financial promotion will have to be issued or
approved by a person holding authorisation and permission from the FSA. If
requirements as to authorisation of the originator and brokers or as to
advertising are not complied with, the regulated mortgage contract will be
unenforceable against the borrower except with approval of a court.

      The seller will be required to hold authorisation and permission to enter
into and to administer and where applicable, to advise on regulated mortgage
contracts. Brokers (in certain circumstances) will be required to hold
authorisation and permission to arrange and, where applicable, to advise on
regulated mortgage contracts.

      In August 2002, H.M. Treasury published feedback to its third consultation
on mortgage regulation. This feedback confirms HM Treasury's intention that the
Issuer and mortgages trustee will not carry on any regulated activity in
relation to regulated mortgage contracts that are administered pursuant to an
administration agreement by an entity having the required authorisation and
permission. If such administration agreement terminates, however, the Issuer and
mortgages trustee

                                       22

<PAGE>

will have a period of not more than one month in which to arrange for mortgage
administration to be carried out by a replacement administrator having the
required authorisation and permission.

      In August 2002, the FSA published feedback to its consultation on conduct
of business rules on entering into and administering regulated mortgage
contracts. This feedback annexes near-final draft rules on certain
post-origination matters, such as product disclosure on and after origination
and, where applicable, provision of an FSA information sheet on mortgage
arrears.

      In August 2002, the FSA also published its consultation on arranging and
advising on regulated mortgage contracts. This consultation annexes draft rules
on certain pre-origination matters, such as financial promotions, and draft
pre-application illustrations.

      The FSA is expected to consult further in the first quarter of 2003 on
issues relating to the meeting of the threshold conditions for authorisation in
relation to regulated mortgage contracts, and in the second quarter of 2003 on
conduct of business rules, with a view to publishing final rules in the second
half of 2003.

      No assurance can be given that additional regulations from the OFT, the
FSA or any other regulatory authority will not arise with regard to the mortgage
market in the United Kingdom generally, the seller's particular sector in that
market or specifically in relation to the seller. Any such action or
developments may have a material adverse effect on the loans, the seller, the
Issuer and/or the servicer and their respective businesses and operations. This
may adversely affect our ability to make payments in full on the Issuer Notes
when due.

      In September 2002, the European Commission published a proposal for a
directive of the European Parliament and of the Council on the harmonization of
the laws, regulations and administrative provisions of the member states
concerning credit for consumers and surety agreements entered into by consumers.
If the proposed directive is finalized, member states will have two years in
which to bring national implementing legislation into force. The proposal
includes (among other things) specific documentation and procedural requirements
in respect of mortgage loan origination and administration; for example, a key
requirement under the proposed directive is that each drawing under a flexible
mortgage loan, and each further advance, must be subject to new underwriting and
a new contract. Penalties for non-compliance with these requirements will be
determined by the member states, and may include provision that credit
agreements that do not comply will be unenforceable against the borrower.

      In its current form, the proposed directive will not apply to residential
mortgage loans for home purchase or home improvement, other than loans where
part of the mortgage credit is for equity release, such as a further drawing
under a flexible mortgage loan or a further advance. Additionally, the proposed
directive will not apply to residential mortgage loans originated before
national implementing legislation comes into force, with exceptions; for
example, the requirement for new underwriting will apply to any further drawing
or further advance made after national implementing legislation comes into
force. Accordingly, if implemented in its current form, the proposed directive
will apply to each mortgage loan that includes an equity release component, if
the mortgage loan is originated, or a further drawing or further advance is made
within that mortgage loan, after the implementation date.

      Until the final text of the directive is decided and the details of United
Kingdom implementing legislation are published, it is not certain what effect
the adoption and implementation of the directive would have on the mortgage loan
and/or the seller, the Issuer and/or the servicer and their respective
businesses and operations. No assurance can be given that the finalized
directive will not adversely affect our ability to make payments in full on the
Issuer Notes when due.

Regulations in the United Kingdom could lead to some terms of the loans being
unenforceable, which may adversely affect payments on the Issuer Notes

      In the United Kingdom, the Unfair Terms in Consumer Contracts Regulations
1999, as amended and the Unfair Terms in Consumer Contracts Regulations 1994
(the "regulations") apply to

                                       23

<PAGE>

agreements entered into on or after July 1, 1995 and affect all of the loans.
The regulations provide that:

      .    a borrower may challenge a term in an agreement on the basis that it
           is an "unfair" term within the regulations and therefore not binding
           on the borrower; and

      .    the Director General of Fair Trading (as head of the Office of Fair
           Trading), the FSA and any other "qualifying body" (as defined in the
           regulations) may seek to prevent a business from relying on unfair
           terms.

      The regulations will not generally affect "core terms" which set out the
main subject- matter of the contract, such as the borrower's obligation to repay
the principal. However, they may affect terms that are not considered to be core
terms, such as the right of the lender to vary the interest rate.

      For example, if a term permitting a lender to vary the interest rate (as
the servicer is permitted to do) is found to be unfair, the borrower will not be
liable to pay the increased rate or, to the extent that she or he has paid it,
will be able, as against the lender, or any assignee such as the mortgages
trustee, to claim repayment of the extra interest amounts paid or to set-off the
amount of the claim against the amount owing by the borrower under the loan. Any
such non-recovery, claim or set-off ultimately may adversely affect our ability
to make payments on the Issuer Notes.

      In August 2002, the Law Commission and the Scottish Law Commission issued
a joint consultation LCCP No. 166/SLCDP 119 on proposals to rationalize the
Unfair Contract Terms Act 1977 and the regulations into a single piece of
legislation and a final report is expected by January 2004. The Law Commissions
have a duty under section 3 of the Law Commissions Act 1965 to keep the law
under review for a number of purposes, including its simplification. The
proposals are primarily to simplify the legislation on unfair terms. It is not
proposed that there should be any significant increase in the extent of controls
over terms in consumer contracts. Some changes are proposed, however, such as
that the legislation should not affect core terms in so far as they are not
substantially different from what the borrower should reasonably expect and are
transparent. It is too early to tell how the proposals, if enacted, would affect
the loans.

Tax payable by Funding or the Issuer may adversely affect the Issuer's ability
to make payments on the Issuer Notes

      Funding and the Issuer will generally be subject to UK corporation tax,
currently at a rate of 30 per cent., on the profit reflected in their respective
profit and loss accounts as increased by the amount of any non-deductible
expenses or losses. If the tax payable by Funding or the Issuer is greater than
expected because, for example, non-deductible expenses or losses are greater
than expected, the funds available to make payments on Issuer Notes will be
reduced and this may adversely affect the Issuer's ability to make payments on
the Issuer Notes.

The European Directive on the Taxation of Savings may adversely affect
noteholders' interests

      On June 3, 2003, the European Council of Economics and Finance Ministers
(ECOFIN) adopted a new directive regarding the taxation of savings income under
which, with effect from January 1, 2005, each Member State will be required to
provide to the tax authorities of each other Member State details of payments of
interest (or similar income) paid by a person within the first Member State's
jurisdiction to any individual resident in that other Member State, except that,
for an indefinite transitional period, Belgium, Luxembourg and Austria will
instead be required to operate a withholding tax system on such payments (the
ending of such transitional period being dependent upon the conclusion of
certain other agreements relating to information exchange with certain other
countries).

Noteholders' interests may be adversely affected if the United Kingdom joins the
European Monetary Union

      It is possible that prior to the maturity of the Notes, the United Kingdom
may become a participating Member State in the European economic and monetary
union and the euro may become the lawful currency of the United Kingdom. In that
event (a) all amounts payable in respect of the Issuer Notes denominated in
pounds sterling may become payable in euro, (b) applicable provisions of law may
require or allow us to redenominate such Issuer Notes into euro and take
additional measures in respect of such Issuer Notes and (c) the introduction of
the euro as the lawful currency of the United Kingdom may result in the
disappearance of published or displayed rates for deposits in sterling used to
determine the rates of interest on such Issuer Notes or changes in the way those
rates

                                       24

<PAGE>

are calculated, quoted and published or displayed. The introduction of the euro
could also be accompanied by a volatile interest rate environment which could
adversely affect investors. It cannot be said with certainty what effect, if
any, adoption of the euro by the United Kingdom will have on investors on the
Issuer Notes.

Changes of law may adversely affect noteholders' interests

      The structure of the issue of the Issuer Notes and the ratings which are
to be assigned to them are based on English law in effect as at the date of this
annual report. No assurance can be given as to the impact of any possible change
to English law or administrative practice in the United Kingdom after the date
of this annual report.

Insolvency Act 2000

      Significant changes to the United Kingdom insolvency regime have been
enacted including the Insolvency Act 2000. The Act allows for some "small"
companies (which are defined by reference to specific financial and other tests)
to seek court protection from their creditors while putting together proposals
for a company voluntary arrangement ("CVA"). The moratorium from creditor action
will be for an initial period of 28 days from the date on which various
documents are filed with the court, but this period can be extended by the
creditors' meeting or the shareholders' meeting called to consider the CVA
proposals for a further period not exceeding two months giving a total period of
three months. Most of the provisions of the Insolvency Act 2000 came into force
in April 2001 and the moratorium provisions came into force on January 1, 2003.
The issuer and Funding will not be small companies within the current
definition. In addition, the Secretary of State for Trade and Industry has the
power to expand the definition of small company in the future, which may be
detrimental to noteholders' interests. In this respect, we note the proposals in
the Government's White Paper "Modernising Company Law" issued on July 16, 2002
to increase the limits for the definition of small company to the EU maximum
((Pounds)4.8 million turnover, (Pounds)2.4 million balance sheet total, 50
employees). Secondary legislation has now been passed which excludes certain
special purpose companies from the optional moratorium provisions. Such
exceptions include (inter alia) (i) a company which is a party to an agreement
which is or forms part of a "capital market arrangement" under which a party has
incurred a debt of at least (Pounds)10 million and which involves the issue of a
"capital market investment" and (ii) a company which has incurred a liability
(including a present, future or contingent liability) of at least (Pounds)10
million. While there is no guidance as to how the legislation will be
interpreted, both the issuer and Funding should fall within one of the
exceptions.

      The mortgages trustee will fall within the current definition of a "small
company" under section 247 of the Companies Act 1985, which is the definition
used for the purposes of the Insolvency Act 2000.

Enterprise Act 2002

      On November 7, 2002, the Enterprise Act 2002 received Royal Assent. The
Act contains significant reforms to both personal and corporate insolvency law.
These reforms, which are expected to be implemented in or around June 2003, will
restrict the right of the holder of a floating charge to appoint an
administrative receiver and instead will give primacy to collective insolvency
procedures and in particular administration. The Government's aim is that,
rather than having primary regard to the interests of secured creditors, any
insolvency official should have regard to the interests of all creditors, both
secured and unsecured, and the primary emphasis will be on rescuing the company.
Presently, the holder of a floating charge over the whole or substantially the
whole of the assets of a company has the ability to block the appointment of an
administrator by appointing an administrative receiver, who primarily acts in
the interests of the floating charge holder though there are residual duties to
the chargor and others with an interest in the equity of redemption.

      The Enterprise Act 2002 contains provisions which would allow the
appointment of an administrative receiver in relation to certain transactions in
the capital markets. The current wording of the relevant exception provides that
the right to appoint an administrative receiver would be retained for certain
types of security (such as the issuer security) that form part of a capital
market arrangement (as defined in the Enterprise Act 2002) that involves
indebtedness of at least (Pounds)50,000,000 (or, when the agreement was entered
into, it was expected to incur a debt of at least (Pounds)50,000,000) and the
issue of a capital market investment (also defined but generally a rated, listed
or traded bond). The Secretary of State for Trade and Industry is given the
power to modify the exceptions by secondary legislation and the Government has
indicated that changes will be made to the capital market exception before the
Enterprise Act 2002 comes into force. As the capital market exception currently

                                       25

<PAGE>

refers to security granted to a trustee in favour of the holder(s) of a capital
market investment, concerns have been expressed as to whether the capital market
exception would allow an administrative receiver to be appointed in respect of
the security granted by Funding and, unless the capital market exception is
amended by secondary legislation, no assurance can be given that such security
would fall within the capital market exception.

      In a press notice issued by the Department of Trade and Industry on
November 9, 2001, the Secretary of State for Trade and Industry confirmed that
the Government's proposed abolition of administrative receivership would not
apply to corporate lending agreements predating the commencement of the relevant
provisions, and that the current insolvency law provisions would continue to
apply to such lending agreements supported by a floating charge. While the
Enterprise Bill was at the committee stage in the House of Commons, although a
proposed amendment which was designed to prevent the Secretary of State from
abolishing administrative receivership retrospectively was withdrawn, a
"reassurance" was given that the Enterprise Act 2002 would not apply
retrospectively. The Enterprise Act 2002 does not state expressly that the
existing administrative receivership regime will be available in respect of
security created before the relevant provisions come into force. If the date
designated by the Secretary of State for Trade and Industry is the date of
commencement of the corporate insolvency provisions, the prohibition on the
appointment of an administrative receiver should not prevent the appointment of
an administrative receiver pursuant to the floating charges comprised in the
security granted by the issuer and Funding as those charges were created prior
to the relevant provisions of the Enterprise Act 2002 coming into force.
However, if the Government reconsiders its position and determines that the
corporate insolvency provisions of the Enterprise Act 2002 will apply
retrospectively, no assurance can be given that the Enterprise Act 2002 will not
have a detrimental effect on the interests of Noteholders.

      The Enterprise Act 2002 will also introduce a new out-of-court route into
administration for a qualifying floating charge-holder, the directors or the
company itself. There will be a notice period during which the holder of the
floating charge can either agree to the administrator proposed by the directors
or the company or appoint an alternative administrator, although the moratorium
will take effect immediately after notice is given. If the qualifying floating
charge holder does not respond to the directors' notice of intention to appoint,
the company's appointee will automatically take office after the notice period
has elapsed. Where the holder of the floating charge retains the power to
appoint an administrative receiver, it may prevent the appointment of an
administrator out of court by appointing an administrative receiver prior to the
appointment of the administrator being completed.

      The Enterprise Act 2002 gives primary emphasis to the rescue of the
company as a going concern. The purpose of realising property to make a
distribution to secured creditors is subordinated to the primary purposes of
rescuing the company as a going concern or achieving a better result for the
creditors as a whole. These purposes could conflict with the wishes or interests
of Noteholders. Nevertheless, the Enterprise Act 2002 makes it clear that the
unsecured creditors would not be able to approve administrators' proposals that
affect the rights of the secured creditors to enforce their security although it
is not clear how this provision of the Act will be interpreted.

Decisions of the Ombudsman could lead to some terms of the loans being
unenforceable, which may adversely affect payments on the Issuer Notes

      Under FSMA, the Financial Ombudsman Service is empowered to make decisions
on, among other things, complaints relating to the terms in agreements for the
provision of financial services, including loans, on the basis of what, in the
Ombudsman's opinion, would be fair and reasonable in all circumstances of the
case, taking into account, among other things, law and guidance. Such complaints
are generally decided on a case by case basis by the Financial Ombudsman
Service, with reference to the particular facts of any individual case. Each
case is first adjudicated by an adjudicator. Either party to the case may appeal
against the adjudication. In the event of an appeal, the case proceeds to a
final decision by the Ombudsman.

      No Financial Ombudsman Service decision against the seller has had a
material adverse effect on the Issuer's ability to make payments on the Issuer
Notes. However, given the Financial Ombudsman Service's wide jurisdiction in
respect of fairness in the provision of financial services, it cannot be said
with certainty what effect, if any, any future decision of the Financial
Ombudsman Service may have on the Issuer's ability to make payments on the
Issuer Notes.

                                       26

<PAGE>

Proposed changes to the Basel Capital Accord and the risk-weighted asset
framework may result in changes to the risk-weighting of Issuer Notes

      The Basel Committee on Banking Supervision has issued proposals for reform
of the 1988 Capital Accord and has proposed a framework which places enhanced
emphasis on market discipline. The consultation period on the initial proposals
ended in March 2000 and the Committee published its second consultation
document, the "New Basel Capital Accord", on January 16, 2001. The consultation
period on the further proposals contained in the New Basel Capital Accord ended
on May 31, 2001. Although the Basel Committee had announced previously that it
would release a revised proposal in early 2002, this has now been delayed
pending the completion of a review assessing the overall impact of the proposals
on banks and the banking system. On October 1, 2002, the Basel Committee
launched a comprehensive field test for banks of its revised proposals known as
the quantitive impact study, or QIS3, which is focused on the minimum capital
requirements under pillar one of the new Basel Capital Accord. The survey period
ended on December 20, 2002. It is anticipated that the revised proposals will be
issued for public comment in the second quarter of 2003. The Committee intends
to finalize the new Basel Capital Accord in the fourth quarter of 2003, allowing
for implementation of the new framework in each country at year end 2006. If
adopted in their current form, the proposals could affect risk weighting of the
Issuer Notes in respect of certain investors if those investors are regulated in
a manner which will be affected by the proposals. Consequently, noteholders
should consult their own advisers as to the consequences to and effect on them
of the potential application of the New Basel Capital Accord proposals. We
cannot predict the precise effects of potential changes which might result if
the proposals were adopted in their current form.

Certain events may affect the eligibility of the series 1 class A Issuer Notes
for investment by money market funds

      The series 1 class A Issuer Notes are eligible for purchase by money
market funds under Rule 2a-7 under the United States Investment Company Act of
1940, as amended. However, under Rule 2a-7, a money market fund may be required
to dispose of the series 1 class A Issuer Notes upon the occurrence of any of
the following events:

        .  the rating currently assigned to the series 1 class A Issuer Notes is
           lowered or withdrawn;

        .  a material default occurs with respect to the series 1 class A Issuer
           Notes;

        .  the money market fund determines that the series 1 class A Issuer
           Notes no longer present minimal credit risk;

        .  upon certain events of insolvency with respect to the issuer; or

      the series 1 class A Issuer Notes otherwise cease to meet the eligibility
      criteria under Rule 2a-7.

Item 4. Information on the Company

        A.  History and Development of the Company

        Not applicable.

        B.  Business Overview

        Not applicable.

        C.  Organizational Structure

        Not applicable.

                                       27

<PAGE>

      D.     Property, Plant and Equipment

      The property of the Issuer consists solely of its right to receive
payments of interest and principal from Funding on the various Term Advances
made under the Intercompany Loan Agreement. The property of Funding consists of
its interest in the trust property held by Trustees together with amounts
available under two reserve funds and its right to receive certain payments of
principal and interest from the trust property controlled by Trustees. The trust
property includes the loans in the portfolio at the closing date or which have
subsequently been assigned to the mortgages trustee thereafter (including any
new drawings under flexible loans) and their related security and any income
generated by the loans or their related security. The composition of the trust
property will fluctuate as drawings under flexible loans and new loans are added
and as the loans that were previously part of the trust property are repaid,
mature, default or are repurchased by the seller. The trust property also
includes any money in the mortgages trustee guaranteed investment contract (or
GIC) account and in any other bank account or bank accounts held by the
mortgages trustee (as agreed by the mortgages trustee, Funding, the seller and
the security trustee) from time to time, called the alternative accounts. The
mortgages trustee GIC account is the bank account in which the mortgages trustee
holds any cash that is part of the trust property until it is distributed to the
beneficiaries. The alternative accounts are accounts into which payments by some
mortgage borrowers are paid initially.

      The officers' certificate of compliance of the Issuer, executed by two
directors of the Issuer are filed as Exhibit 10.19 to this Annual Report on Form
20-F. The certificate of compliance contains a statement that during the period
from November 8, 2001 to April 30, 2003, to the best of the knowledge and belief
of the signatories, the Issuer has complied with all its obligations contained
in the Issuer Trust Deed and each of the Transaction Documents (as defined in
the Issuer Trust Deed) to which it is a party. It also contains a statement that
as at April 30, 2003, there did not exist and had not existed since November 8,
2001, any Note Event of Default (as defined in the Issuer Trust Deed).

Item 5.  Operating and Financial Review and Prospects

         A.  Operating Results

         Not applicable.

         B.  Liquidity and Capital Resources

         Not applicable.

         C.  Research and Development, Patents and Licenses, etc.

         Not applicable.

         D.  Trend Information

         Not applicable.

Item 6.  Directors, Senior Management and Employees

         A.  Directors and Senior Management

         The following sets out the names, business addresses and business
occupations of the directors of the Issuer, Funding and Trustees. Because each
of the Issuer, Funding and Trustees is organized as a special purpose company
and will be largely passive, it is expected that the directors of each entity in
that capacity will manage its operations to the extent necessary.

                                       28

<PAGE>

       Issuer
       ------

<TABLE>
<CAPTION>
Name                           Business Address                Business Occupation
----                           ----------------                -------------------
<S>                            <C>                             <C>
Martin McDermott               SPV Management Limited          Executive Director of SPV
                               Tower 42                        Management Limited
                               25 Old Broad Street
                               London  EC2N 1HQ

SPV Management Limited         SPV Management Limited          Management of special purpose
                               Tower 42                        companies
                               25 Old Broad Street
                               London  EC2N 1HQ

David Green                    Abbey National House            Financial Controller
                               2 Triton Square
                               Regent's Place
                               London NW1 3AN
</TABLE>

       Funding
       -------

<TABLE>
<CAPTION>
Name                           Business Address                Business Occupation
----                           ----------------                -------------------
<S>                            <C>                             <C>
Martin McDermott               SPV Management Limited          Executive Director of SPV
                               Tower 42                        Management Limited
                               25 Old Broad Street
                               London  EC2N 1HQ

SPV Management Limited         SPV Management Limited          Management of special purpose
                               Tower 42                        companies
                               25 Old Broad Street
                               London  EC2N 1HQ

David Green                    Abbey National House            Financial Controller
                               2 Triton Square
                               Regent's Place
                               London NW1 3AN
</TABLE>

       Trustees
       --------

<TABLE>
<CAPTION>
Name                           Business Address                Business Occupation
----                           ----------------                -------------------
<S>                            <C>                             <C>
Martin McDermott               SPV Management Limited          Executive Director of SPV
                               Tower 42                        Management Limited
                               25 Old Broad Street
                               London  EC2N 1HQ

SPV Management Limited         SPV Management Limited          Management of special purpose
                               Tower 42                        companies
                               25 Old Broad Street
                               London  EC2N 1HQ

David Green                    Abbey National House            Financial Controller
                               2 Triton Square
                               Regent's Place
                               London NW1 3AN
</TABLE>

                                       29

<PAGE>

        David Green is an employee of the Abbey National plc, the seller.

        B.  Compensation

        None of the Issuer, Funding or Trustees pays remuneration directly to
any director.

        C.  Board Practices

        Not applicable.

        D.  Employees

        Not applicable.

        E.  Share Ownership

        Not applicable.

Item 7. Major Shareholders and Related Party Transactions

        A.  Major Shareholders

        Each of the Issuer, Funding and Trustees is wholly owned by Holmes
Holdings Limited, a private limited company incorporated under the laws of
England and Wales. SPV Management Limited holds all of the beneficial interest
in the issued shares of Holmes Holdings Limited on a discretionary trust for
persons employed as nurses in the United Kingdom and for charitable purposes.
SPV Management Limited is not affiliated with Abbey National plc.

        B.  Related Party Transactions

        None, other than with respect to the making of payments in respect to
the securities as described in the Registration Statement and "Item 3.D. - Risk
Factors."

        C.  Interests of Experts and Counsel

        Not applicable to annual reports on Form 20-F.

Item 8. Financial Information

        For a discussion of the available financial information, see "Item 3.A.
- Selected Financial Information."

        Litigation. The Issuer knows of no material legal proceedings involving
the Issuer. Funding knows of no material legal proceedings involving Funding.
Trustees knows of no material legal proceedings involving Trustees or the trust.

Item 9. The Listing

        A.  Listing Details

        Not applicable.

        B.  Plan of Distribution

        Not applicable to annual reports on Form 20-F.

                                       30

<PAGE>

     C. Markets

     The principal trading market for each class of Issuer Notes is the London
Stock Exchange. The Issuer Notes have been listed on the London Stock Exchange
since November 8, 2001.

     D. Selling Shareholders

     Not applicable to annual reports on Form 20-F.

     E. Dilution

     Not applicable to annual reports on Form 20-F.

     F. Expenses of the Issue

     Not applicable to annual reports on Form 20-F.

Item 10.  Additional Information

     A. Share Capital

     Not applicable to annual reports on Form 20-F.

     B. Memorandum and Articles of Association

     Not applicable.

     C. Material Contracts

     Not applicable other than with respect to contracts relating to the
securities, which were described in the Registration Statement on Form S-11
relating to the securities (file number 333-14002).

     D. Exchange Controls

     None.

     E. Taxation

     United Kingdom Taxation

     The following section summarizes the material UK tax consequences of the
purchase, ownership and disposition of the Issuer Notes based on current law and
practice in the UK. The summary assumes that all payments made pursuant to the
final documentation are calculated on arm's length terms. The summary does not
purport to be a complete analysis of all tax considerations of the purchase,
ownership and disposition of the Issuer Notes. It relates to the position of
persons who are the absolute beneficial owners of Issuer Notes and may not apply
to certain classes of persons such as dealers or persons connected with the
Issuer. Holders of Issuer Notes who are unsure as to their tax position should
seek their own professional advice.

     Taxation of US residents

     As discussed in more detail under "Withholding tax" below, no UK
withholding tax will be required in relation to interest payments on the Issuer
Notes provided that the Issuer Notes are listed on a recognised stock exchange.
On the basis of the United Kingdom Inland Revenue's published interpretation of
the relevant legislation, this requirement is satisfied providing the Issuer
Notes are listed by the Financial Services Authority and admitted to trading on
the London Stock Exchange.

                                       31

<PAGE>

     As discussed in more detail under "Direct Assessment of non-UK holders of
Issuer Notes to UK tax on interest" below, a noteholder who is resident in the
US for US tax purposes and not resident in the UK for UK tax purposes will not
be subject to UK tax by direct assessment in respect of any payments on the
Issuer Notes unless they are held by or for a trade, profession or vocation
carried on by him through a branch or agency in the UK.

     Residents of the US who are not subject to UK tax by direct assessment are
generally not subject to tax in the UK on payments on the Issuer Notes under the
terms of the double taxation treaty dated July 24, 2001 between the US and the
UK (the "Treaty"), subject to completion of administrative formalities, except
where the Issuer Notes are effectively connected with a permanent establishment
or a fixed base of the noteholder situated in the UK or certain other exemptions
apply. Relief from UK tax will only be available if the amounts paid on the
Issuer Notes do not exceed the return on comparable debt instruments and if the
noteholders resident in the US satisfy the requirements of the Limitations in
Benefits article of the Treaty. To the extent that the amounts paid do exceed
the return on comparable debt instruments, the UK may tax the excess in
accordance with UK domestic law. Noteholders who are entitled to greater
benefits under the double taxation treaty dated December 31, 1975 between the US
and the UK (the "Old Treaty") are able to elect for the provisions of the Old
Treaty to continue to apply to them for a period of 1 year following the entry
into force of the Treaty (which took place on March 31, 2003).

     Withholding tax

     There will be no UK withholding tax in relation to interest payments on the
Issuer Notes provided 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 in Section 841 of the United Kingdom Income and Corporation Taxes Act
1988 ("ICTA"). On the basis of the United Kingdom Inland Revenue's published
interpretation of this legislation, securities which are to be listed on a stock
exchange in the UK will satisfy this requirement if they are listed by a
competent authority in that country and are admitted to trading on a recognised
stock exchange in that country. The London Stock Exchange is a recognised stock
exchange for this purpose. The Inland Revenue is able to obtain information
about individual holders of the Issuer Notes to whom or, in certain
circumstances, for whose benefit interest is paid. Information so obtained may,
in certain circumstances, be exchanged by the Inland Revenue with the tax
authorities of other jurisdictions.

     On June 3, 2003, the European Council of Economics and Finance Ministers
(ECOFIN) adopted a new directive regarding the taxation of savings income. Under
this directive, with effect from January 1, 2005, each Member State will be
required to provide to the tax authorities of each other Member State details of
payments of interest (or similar income) paid by a person within the first
Member State's jurisdiction to any individual resident in that other Member
State, except that, for an indefinite transitional period, Belgium, Luxembourg
and Austria will instead be required to operate a withholding tax system on such
payments (the ending of such transitional period being dependent upon the
conclusion of certain other agreements relating to information exchange with
certain other countries).

     Direct assessment of non-UK resident holders of Issuer Notes to UK tax on
interest

     The interest on the Issuer Notes has UK source. Accordingly, payments on
the Issuer Notes will in principle be within the charge to UK tax even if paid
without withholding or deduction. However, such payments will not be chargeable
to UK tax in the hands of a noteholder who is not resident for tax purposes in
the UK unless such holder carries on a trade, profession or vocation in the UK
through a UK branch or agency in connection with which the payments are received
or to which the Issuer Notes are attributable, in which case (subject to
exemptions for interest received by certain categories of agent such as some
brokers and investment managers) tax may be levied on the UK branch or agency.

                                       32

<PAGE>

     Taxation of returns: companies within the charge to UK corporation tax

     Noteholders who are within the charge to UK corporation tax (other than
authorized unit trusts) will normally be subject to tax on all profits and
gains, including interest, and (in respect of all accounting periods commencing
on or after October 1, 2002) all foreign exchange gains and losses arising on or
in connection with the Issuer Notes under the loan relationship rules contained
in the Finance Act 1996. Any such profits and gains will generally fall to be
calculated in accordance with the statutory accounting treatment of the Issuer
Notes in the hands of the relevant noteholder, and will generally be charged to
tax as income in respect of each accounting period to which they are allocated,
in accordance with that accounting treatment. Relief may be available in respect
of losses or for related expenses on a similar basis.

     For holders within the charge to UK corporation tax (other than authorized
unit trusts and investment trusts), the series 1 Issuer Notes and series 3
Issuer Notes will (in respect of all accounting periods commenced prior to
October 1, 2002) be qualifying assets for the purposes of the taxation of
foreign exchange gains and losses. Any changes in the sterling value of such
Issuer Notes as a result of changes in the sterling/US dollar exchange rate or
the sterling/euro exchange rate, as appropriate, during each such accounting
period in which such a holder holds such Issuer Notes will generally be taxed or
relieved by reference to the holder's accounting treatment of such Issuer Notes.

     Taxation of returns: other noteholders

     Noteholders who are not within the charge to UK corporation tax and who are
resident or ordinarily resident in the UK for tax purposes or who carry on a
trade, profession or vocation in the UK through a branch or agency in connection
with which interest on the Issuer Notes is received or to which the Issuer Notes
are attributable will generally be liable to UK tax on the amount of any
interest received in respect of the Issuer Notes. The series 1 Issuer Notes and
series 3 Issuer Notes will not be qualifying corporate bonds within the meaning
of Section 117 of the United Kingdom Taxation of Chargeable Gains Act 1992 and
therefore a disposal of such an Issuer Note by such a noteholder may give rise
to a chargeable gain or an allowable loss for the purpose of UK capital gains
tax.

     A disposal of Issuer Notes by a noteholder who is resident or ordinarily
resident in the UK for tax purposes or who carries on a trade in the UK through
a branch or agency to which the Issuer Notes are attributable may also give rise
to a charge to tax on income in respect of an amount representing interest
accrued on the Issuer Notes since the preceding payment date. For Issuer Notes
which constitute variable rate securities, taxation in respect of such a
disposal will be computed on the basis that such amount as the Inland Revenue
considers to be just and reasonable will be treated as accrued income. However,
the transferee of a variable rate security will not be entitled to any relief on
such amount. All of the series 1 Issuer Notes and series 3 Issuer Notes will
constitute variable rate Issuer Notes for this purpose.

     Stamp duty and stamp duty reserve tax

     No UK stamp duty or stamp duty reserve tax is payable on the issue or
transfer of the offered global Issuer Notes or on the issue or transfer of an
Issuer Note in definitive form.

     UK taxation of Funding and the Issuer

     Funding and the Issuer will generally be subject to UK corporation tax,
currently at a rate of 30 per cent., on the profit reflected in their respective
profit and loss accounts as increased by the amounts of any non-deductible
expenses or losses. Examples of non-deductible expenses and losses include
general provisions for bad debts. In respect of Funding, the profit in the
profit and loss account will not exceed 0.01 per cent., of the Funding available
revenue receipts. In respect of the Issuer, the profit in the profit and loss
account will not exceed 0.02 per cent., of the interest on the issuer term
advances under the issuer intercompany loan. See the risk factor "Tax payable by
Funding or the Issuer may adversely affect the Issuer's ability to make payments
on the Issuer Notes".

                                       33

<PAGE>

     UK taxation of Trustees

     Trustees will have no liability to UK tax in respect of any income, profit
or gain arising under these arrangements, apart from a liability to UK
corporation tax on amounts, such as trustee fees and expenses, which are paid to
Trustees for its own benefit. Accordingly, Trustees will have no liability to UK
tax in relation to amounts which it receives on behalf of Funding or the seller
under the mortgages trust.

     United States Taxation

     General

     The following section summarizes the material federal income tax
consequences of the purchase, ownership and disposition of the series 1 class A
Issuer Notes, series 1 class B Issuer Notes, series 1 class C Issuer Notes,
series 2 class A Issuer Notes, series 2 class B Issuer Notes and series 2 class
C Issuer Notes (the "US Issuer Notes") that may be relevant to a noteholder that
is a "US holder" (as defined later in this section). In general, the summary
assumes that a holder acquires a US Issuer Note at original issuance and holds
such Note as a capital asset. It does not purport to be a comprehensive
description of all the tax considerations that may be relevant to a decision to
purchase the US Issuer Notes. In particular, it does not discuss special tax
considerations that may apply to certain types of taxpayers, including dealers
in stocks, securities or notional principal contracts; traders in securities
electing to mark to market; banks, savings and loan associations and similar
financial institutions; taxpayers whose functional currency is other than the US
dollar; and taxpayers that hold a US Issuer Note as part of a hedge or straddle
or a conversion transaction, within the meaning of section 1258 of the US
Internal Revenue Code of 1986, as amended (the "Code"). In addition, this
summary does not describe any tax consequences arising under the laws of any
taxing jurisdiction other than the US federal government.

     This summary is based on the US tax laws, regulations, rulings and
decisions in effect or available on the effective date of the registration
statement. All of the foregoing are subject to change, and any change may apply
retroactively and could affect the continued validity of this summary.

     The Issuer suggests that US holders consult their own tax advisors as to
the US federal income tax consequences of the purchase, ownership and
disposition of the US Issuer 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 this section, the term "US holder" means a person who is a
citizen or resident of the United States, a US domestic corporation or
partnership, or any other person subject to US federal income tax on a net
income basis in respect of a US Issuer Note.

     Characterization of the US Issuer Notes

     Although there is no authority regarding the treatment of instruments that
are substantially similar to the US Issuer Notes, the Issuer believes that the
US Issuer Notes will be treated as debt for US federal income tax purposes
(either of the Issuer or of Funding). The Issuer intends to treat the US Issuer
Notes as indebtedness of the Issuer for all purposes, including US tax purposes.
The discussion in the next section assumes this result.

     The US Issuer Notes will not be qualifying real property loans in the hands
of domestic savings and loan associations, real estate investment trusts, or
REMICs under sections 7701(a)(19)(C), 856(c)(5)(A) or 860G(a)(3) of the Code,
respectively.

     Taxation of US holders of the US Issuer Notes

     Qualified Stated Interest. A US holder of a US Issuer Note will treat
stated interest on such US Note as ordinary interest income when paid or
accrued, in accordance with its tax method of accounting.

                                       34

<PAGE>

     Sales and Retirement. In general, a US holder of a US Issuer Note will have
a basis in such Note equal to the cost of the US Issuer Note to such holder, and
reduced by any payments thereon other than payments of stated interest. Upon a
sale or exchange of the US Issuer Note, a US holder will generally recognize
gain or loss equal to the difference between the amount realized (less any
accrued interest, which would be taxable as such) and the holder's tax basis in
the US Issuer Note. Such gain or loss will be long-term capital gain or loss if
the US holder has held the US Issuer Note for more than one year at the time of
disposition. In certain circumstances, US holders that are individuals may be
entitled to preferential treatment for net long-term capital gains. The ability
of US holders to offset capital losses against ordinary income is limited.

     Market Discout and Bond Premium. If a US holder purchased US Issuer Notes
for a price greater or less than their stated principal amount, such notes may
be subject to special US tax rules relating to market discount or bond premium.
US holders should consult their own advisors regarding the tax consequences of
these rules.

     US Issuer Notes as debt of Funding

     The U.S. Internal Revenue Service ("IRS") could possibly seek to
characterize the series 1 class A Issuer Notes, the series 1 class B Issuer
Notes, the series 1 class C Issuer Notes, the series 2 class A Issuer Notes, the
series 2 class B Issuer Notes and the series 2 class C Issuer Notes as ownership
interests in the issuer series 1 term AAA advance, the issuer series 1 term AA
advance, the issuer series 1 term BBB advance, the issuer series 2 term AAA
advance, the issuer series 2 term AA advance and the issuer series 2 term BBB
advance, respectively, rather than as debt of the Issuer. If the IRS were
successful in such a characterization, a US holder of a US Issuer Note would be
treated as owning (i) a pro rata share of the related issuer term advance
between Funding and the Issuer ("related advance"), which will be treated as
debt for US federal income tax purposes and (ii) an interest in the related
issuer currency swap. Treasury regulations permit taxpayers meeting certain
requirements to integrate a debt instrument and a related currency hedge and to
treat them for most tax purposes as if they were a synthetic debt instrument
having the terms of the debt instrument and hedge combined. Integrating the
related advance and issuer currency swap would create a synthetic debt
instrument having the characteristics of the US Issuer Notes and hence would
produce largely the same result as if the US Issuer Notes were not
recharacterized as debt of Funding.

     The integration regulations apply only if a taxpayer creates a record
identifying the debt instrument and hedge on or before the close of the date the
hedge is entered into. The Issuer will create a record that is intended to
provide such identification effective for each US holder as of the date of
acquisition of a US Issuer Note. By its acquisition of a US Issuer Note, each US
holder will be treated as having appointed the Issuer as its agent for this
purpose. The IRS could challenge the effectiveness of such an identification
made on behalf of a group of taxpayers. The integration rules would not apply to
a US holder that is related to the Issuer swap provider to the issuer currency
swap.

     If the issuer currency swap terminated before the US Issuer Notes were
retired, and the integration regulations applied, then a US holder may be
considered to recognize gain or loss as if the holder had sold for fair market
value his interest in the related advance. Moreover, for periods following such
termination, the integration rules would no longer apply to the related advance
except in the discretion of the IRS.

     If the issuer currency swap were not integrated with the related advance,
then a US holder would calculate separately income and deductions from the
issuer currency swap and income from the related advance. For most holders, the
tax consequences of treating the issuer currency swap and related advances
separately would be similar to the treatment if they were combined, but there
could be differences. For example, income from the issuer currency swap may be
sourced differently from income from the related advance. Individual taxpayers
may be allowed deductions for payments made under the issuer currency swap only
as a miscellaneous itemized deduction (which is allowed for regular tax purposes
only subject to limitations and is not allowed for alternative minimum tax
purposes). US holders may wish to consult their own tax advisors regarding the
possible treatment of US Issuer Notes as debt of Funding, application of the
integration rules, and the consequences of an inability to integrate the issuer
currency swap and the related advance.

                                       35

<PAGE>

     F. Dividends and Paying Agents

     Not applicable to annual reports on Form 20-F.

     G. Statement by Experts

     Not applicable to annual reports on Form 20-F.

     H. Documents on Display

     The Issuer, Funding and Trustees are subject to the information
requirements of the U.S. Securities Exchange Act of 1934, as amended, and are
therefore required to file reports, including annual reports on Form 20-F, and
other information with the U.S. Securities and Exchange Commission. These
materials, including this annual report and the exhibits thereto, may be
inspected and copied at the Commission's public reference rooms in Washington,
DC, New York, NY and Chicago, IL. Please call the Commission at +1-800-732-0330
for further information on the public reference rooms. As foreign private
issuers, the Issuer, Funding and Trustees are not required to make filings with
the Commission by electronic means, although we are entitled to do so. Any
filings we make electronically will be made available to the public over the
internet at the Commission's web site at http://www.sec.gov.

     I. Subsidiary Information

     Not applicable to annual reports on Form 20-F.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

     See the Periodic Reports referred to in "Item 3.A. - Selected Financial
Information."

Item 12. Description of Securities Other than Equity Securities

     Not applicable to annual reports on Form 20-F.

                                     PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

     None.

Item 14. Material Modifications to the Rights of Security Holders

     None.

Item 15. Controls and Procedures

     Not applicable.

Item 16. [Reserved]

                                    PART III

Item 17. Financial Statements

     Not applicable.

                                       36

<PAGE>

Item 18. Financial Statements

     Not applicable.

Item 19. Exhibits

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

1.  Exhibit 1: Certificate pursuant to section 302 of the Sarbanes-Oxley Act
    2002

2.  Exhibit 2: Certificate pursuant to section 906 of the Sarbanes-Oxley Act
    2002

3.  Exhibit 3: a copy of the Memorandum and Articles of Association of each of
    the Issuer, Funding and Trustees is incorporated by reference from the
    previously filed Registration Statement on Form S-11 relating to the
    securities (file number 333-14002)

4.  Exhibit 4: instruments defining the rights of the security holders are
    incorporated by reference from the previously filed Registration Statement
    on Form S-11 relating to the securities (file number 333-14002)

5.  Exhibit 10.1: Periodic Report for the period from November 9, 2001 to
    December 10, 2001 (incorporated by reference from the Form 6-K previously
    filed on January 7, 2002).

6.  Exhibit 10.2: Periodic Report for the period from December 11, 2001 to
    January 8, 2002 (incorporated by reference from the Form 6-K previously
    filed on January 25, 2002).

7.  Exhibit 10.3: Periodic Report for the period from January 9, 2002 to
    February 8, 2002 (incorporated by reference from the Form 6-K previously
    filed on February 22, 2002).

8.  Exhibit 10.4: Periodic Report for the period from February 9, 2002 to March
    8, 2002 (incorporated by reference from the Form 6-K previously filed on
    March 12, 2002).

9.  Exhibit 10.5: Periodic Report for the period from March 9, 2002 to April 8,
    2002 (incorporated by reference from the Form 6-K previously filed on April
    12, 2002).

10. Exhibit 10.6: Periodic Report for the period from April 9, 2002 to May 8,
    2002 (incorporated by reference from the Form 6-K previously filed on May
    23, 2002).

11. Exhibit 10.7: Periodic Report for the period from May 9, 2002 to June 10,
    2002 (incorporated by reference from the Form 6-K previously filed on June
    19, 2002).

12. Exhibit 10.8: Periodic Report for the period from June 11, 2002 to July 8,
    2002 (incorporated by reference from the Form 6-K previously filed on July
    19, 2002).

13. Exhibit 10.9: Periodic Report for the period from July 9, 2002 to August 8,
    2002 (incorporated by reference from the Form 6-K previously filed on August
    22, 2002).

14. Exhibit 10.10: Periodic Report for the period from August 9, 2002 to
    September 9, 2002 (incorporated by reference from the Form 6-K previously
    filed on September 23, 2002).

15. Exhibit 10.11: Periodic Report for the period from September 10, to October
    9, 2002 (incorporated by reference from the Form 6-K previously filed on
    October 22, 2002).

16. Exhibit 10.12: Periodic Report for the period from October 9 to November 8,
    2002 (incorporated by reference from the Form 6-K previously filed on
    November 22, 2002).

                                       37

<PAGE>

17. Exhibit 10.13: Profit and Loss Accounts for Trustees for the period ended
    January 15, 2002 (incorporated by reference from the Form 6-K previously
    filed on February 6, 2002).

18. Exhibit 10.14: Profit and Loss Accounts for Trustees for the period ended
    April 15, 2002 (incorporated by reference from the Form 6-K previously filed
    on May 7, 2002).

19. Exhibit 10.15: Profit and Loss Accounts for Trustees for the period ended
    July 15, 2002 (incorporated by reference from the Form 6-K previously filed
    on August 2, 2002).

20. Exhibit 10.16: Profit and Loss Accounts for Trustees for the period ended
    October 15, 2002 (incorporated by reference from the Form 6-K previously
    filed on November 12, 2002).

21. Exhibit 10.17: Balance Sheets for Trustees for the period ended October 15,
    2002 (incorporated by reference from the Form 6-K previously filed on
    November 12, 2002).

22. Exhibit 10.18: Balance Sheets for Funding for the period ended October 15,
    2002 (incorporated by reference from the Form 6-K previously filed on
    November 12, 2002).

23. Exhibit 10.19: Certificate Relating to Financial Information pursuant to the
    First Issuer Trust Deed dated April 30, 2003 (incorporated by reference from
    the Form 6-K previously filed on June 26, 2003).

24. Exhibit 10.20: Report and Accounts for Holmes Financing (No. 5) PLC for the
    year ended December 31, 2002

25. Exhibit 10.21: Report and Accounts for Holmes Funding Limited for the year
    ended December 31, 2002

26. Exhibit 10.22: Report and Accounts for Holmes Trustees Limited for the year
    ended December 31, 2002

                                       38

<PAGE>

                                    SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, each of the registrant certifies that it meets all the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

HOLMES TRUSTEES LIMITED

By:    /s/ David Green
       ----------------
Name:  David Green
Title: Director

HOLMES FUNDING LIMITED


By:    /s/ David Green
       ----------------
Name:  David Green
Title: Director

HOLMES FINANCING (NO. 5) PLC


By:    /s/ David Green
       ----------------
Name:  David Green
Title: Director


Dated: June 30, 2003

<PAGE>

                                  EXHIBIT INDEX

..  Exhibit 1: Certificate pursuant to section 302 of the Sarbanes-Oxley Act 2002

..  Exhibit 2: Certificate pursuant to section 906 of the Sarbanes-Oxley Act 2002

..  Exhibit 3: a copy of the Memorandum and Articles of Association of each of
   the Issuer, Funding and Trustees is incorporated by reference from the
   previously filed Registration Statement on Form S-11 relating to the
   securities (file number 333-14002)

..  Exhibit 4: instruments defining the rights of the security holders are
   incorporated by reference from the previously filed Registration Statement on
   Form S-11 relating to the securities (file number 333-14002)

..  Exhibit 10.1: Periodic Report for the period from November 9, 2001 to
   December 10, 2001 (incorporated by reference from the Form 6-K previously
   filed on January 7, 2002).

..  Exhibit 10.2: Periodic Report for the period from December 11, 2001 to
   January 8, 2002 (incorporated by reference from the Form 6-K previously filed
   on January 25, 2002).

..  Exhibit 10.3: Periodic Report for the period from January 9, 2002 to February
   8, 2002 (incorporated by reference from the Form 6-K previously filed on
   February 22, 2002).

..  Exhibit 10.4: Periodic Report for the period from February 9, 2002 to March
   8, 2002 (incorporated by reference from the Form 6-K previously filed on
   March 12, 2002).

..  Exhibit 10.5: Periodic Report for the period from March 9, 2002 to April 8,
   2002 (incorporated by reference from the Form 6-K previously filed on April
   12, 2002).

..  Exhibit 10.6: Periodic Report for the period from April 9, 2002 to May 8,
   2002 (incorporated by reference from the Form 6-K previously filed on May 23,
   2002).

..  Exhibit 10.7: Periodic Report for the period from May 9, 2002 to June 10,
   2002 (incorporated by reference from the Form 6-K previously filed on June
   19, 2002).

..  Exhibit 10.8: Periodic Report for the period from June 11, 2002 to July 8,
   2002 (incorporated by reference from the Form 6-K previously filed on July
   19, 2002).

..  Exhibit 10.9: Periodic Report for the period from July 9, 2002 to August 8,
   2002 (incorporated by reference from the Form 6-K previously filed on August
   22, 2002).

..  Exhibit 10.10: Periodic Report for the period from August 9, 2002 to
   September 9, 2002 (incorporated by reference from the Form 6-K previously
   filed on September 23, 2002).

..  Exhibit 10.11: Periodic Report for the period from September 10 to October 9,
   2002 (incorporated by reference from the Form 6-K previously filed on October
   22, 2002).

..  Exhibit 10.12: Periodic Report for the period from October 9 to November 8,
   2002 (incorporated by reference from the Form 6-K previously filed on
   November 22, 2002).

..  Exhibit 10.13: Profit and Loss Accounts for Trustees for the period ended
   January 15, 2002 (incorporated by reference from the Form 6-K previously
   filed on February 6, 2002).

..  Exhibit 10.14: Profit and Loss Accounts for Trustees for the period ended
   April 15, 2002 (incorporated by reference from the Form 6-K previously filed
   on May 7, 2002).

                                      EI-1

<PAGE>

..  Exhibit 10.15: Profit and Loss Accounts for Trustees for the period ended
   July 15, 2002 (incorporated by reference from the Form 6-K previously filed
   on August 2, 2002).

..  Exhibit 10.16: Profit and Loss Accounts for Trustees for the period ended
   October 15, 2002 (incorporated by reference from the Form 6-K previously
   filed on November 12, 2002).

..  Exhibit 10.17: Balance Sheets for Trustees for the period ended October 15,
   2002 (incorporated by reference from the Form 6-K previously filed on
   November 12, 2002).

..  Exhibit 10.18: Balance Sheets for Funding for the period ended October 15,
   2002 (incorporated by reference from the Form 6-K previously filed on
   November 12, 2002).

..  Exhibit 10.19: Certificate Relating to Financial Information pursuant to the
   First Issuer Trust Deed dated April 30, 2003 (incorporated by reference from
   the Form 6-K previously filed on June 26, 2003).

..  Exhibit 10.20: Report and Accounts for Holmes Financing (No. 5) PLC for the
   year ended December 31, 2002

..  Exhibit 10.21: Report and Accounts for Holmes Funding Limited for the year
   ended December 31, 2002

..  Exhibit 10.22: Report and Accounts for Holmes Trustees Limited for the year
   ended December 31, 2002

                                      EI-2