UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-Q



(Mark One)



þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934



|For the quarterly period ended                                                             | September 30, 2006
|------------------------------------------------------------------------------------------ | ------------------
|OR                                                                                        
| ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|For the transition period from                                                             |                   





|Commission file number 1-7422


AMERICAN GENERAL FINANCE, INC.
|--------------------------------------------------------------
|(Exact name of registrant as specified in its charter)        
|Indiana                                                       
|(State of Incorporation)                                      
|601 N.W. Second Street, Evansville, IN                        
|(Address of principal executive offices)                      
|(812) 424-8031                                                
|(Registrants telephone number, including area code)          





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 þ      No  ̈



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ̈      Accelerated filer  ̈      Non-accelerated filer þ



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ̈      No þ



The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.



At November 13, 2006, there were 2,000,000 shares of the registrants common stock, $.50 par value, outstanding.



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Explanatory Note



As previously announced, on March 20, 2006, American General Finance, Inc. (AGFI, or collectively with its subsidiaries, whether directly or indirectly owned, the Company or we) determined that it was necessary to restate our unaudited condensed consolidated financial statements and other financial information at and for the quarters ended March 31, June 30, and September 30, 2005. The restatement related to the correction of errors in our accounting for four cross currency swaps designated as hedges of our foreign currency denominated debt. We included the restated financial information at and for each of the periods being restated in our Annual Report on Form 10-K for the year ended December 31, 2005.



We have included the restated financial information at and for the three and nine months ended September 30, 2005 in this report. See Restatement in Item 2 and Item 4 for further information on this restatement.



2



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TABLE OF CONTENTS





|        | Item |                                                                                       | Page
|------- | ---- | ------------------------------------------------------------------------------------- | ----
|Part I  | 1.   | Financial Statements (Unaudited)                                                      | 4   
|        | 2.   | Managements Discussion and Analysis of Financial Condition and
Results of Operations | 21  
|        | 4.   | Controls and Procedures                                                               | 39  
|Part II | 1.   | Legal Proceedings                                                                     | 40  
|        | 6.   | Exhibits                                                                              | 40  







AVAILABLE INFORMATION



American General Finance, Inc. (AGFI) files annual, quarterly, and current reports and other information with the Securities and Exchange Commission (the SEC). The SECs website, www.sec.gov, contains these reports and other information that registrants (including AGFI) file electronically with the SEC.



The following reports are available free of charge on our website, www.agfinance.com, as soon as reasonably practicable after we file them with or furnish them to the SEC:



·

Annual Reports on Form 10-K;

·

Quarterly Reports on Form 10-Q;

·

Current Reports on Form 8-K; and

·

amendments to those reports.



The information on our website is not incorporated by reference into this report. The website addresses listed above are provided for the information of the reader and are not intended to be active links.



3



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Part I  FINANCIAL INFORMATION





Item 1.  Financial Statements







AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)







|                                              | Three Months Ended | Nine Months Ended
|--------------------------------------------- | ------------------ | -----------------
|                                              | September 30,      | September 30,    
|(dollars in thousands)                        | 2006               | 2005
Restated    
|Revenues
Finance charges                      | $634,633           | $592,662         
|Mortgage banking                              | 78,091             | 1,418            
|Insurance                                     | 38,253             | 39,334           
|Investment                                    | 22,956             | 21,955           
|Net service fees from affiliates              | 690                | 97,855           
|Other                                         | (63,283)           | 33,703           
|Total revenues                                | 711,340            | 786,927          
|Expenses
Interest expense                     | 306,420            | 235,668          
|Operating expenses:
Salaries and benefits     | 136,708            | 140,758          
|Other operating expenses                      | 76,971             | 77,137           
|Provision for finance receivable losses       | 39,796             | 119,470          
|Insurance losses and loss adjustment expenses | 12,942             | 17,357           
|Total expenses                                | 572,837            | 590,390          
|Income before provision for income taxes      | 138,503            | 196,537          
|Provision for Income Taxes                    | 45,456             | 72,903           
|Net Income                                    | $  93,047          | $123,634         









See Notes to Condensed Consolidated Financial Statements.



4



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AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)







|                                                                      | September 30, | December 31,
|--------------------------------------------------------------------- | ------------- | ------------
|(dollars in thousands)                                                | 2006          | 2005        
|Assets

Net finance receivables:
Real estate loans                    | $19,163,163   | $19,024,577 
|Non-real estate loans                                                 | 3,403,913     | 3,216,942   
|Retail sales finance                                                  | 1,764,114     | 1,546,995   
|Net finance receivables                                               | 24,331,190    | 23,788,514  
|Allowance for finance receivable losses                               | (484,500)     | (522,831)   
|Net finance receivables, less allowance for finance
receivable losses | 23,846,690    | 23,265,683  
|Real estate loans held for sale                                       | 860,768       | 154,088     
|Investment securities                                                 | 1,357,711     | 1,334,081   
|Cash and cash equivalents                                             | 170,518       | 192,531     
|Other assets                                                          | 1,057,392     | 855,144     
|Total assets                                                          | $27,293,079   | $25,801,527 
|Liabilities and Shareholders Equity

Long-term debt                  | $18,464,374   | $18,314,837 
|Short-term debt                                                       | 5,038,982     | 3,809,412   
|Insurance claims and policyholder liabilities                         | 386,600       | 398,051     
|Other liabilities                                                     | 515,642       | 480,594     
|Accrued taxes                                                         | 16,215        | 19,614      
|Total liabilities                                                     | 24,421,813    | 23,022,508  
|Shareholders equity:
Common stock                                    | 1,000         | 1,000       
|Additional paid-in capital                                            | 1,016,305     | 1,016,305   
|Accumulated other comprehensive income                                | 25,556        | 32,858      
|Retained earnings                                                     | 1,828,405     | 1,728,856   
|Total shareholders equity                                            | 2,871,266     | 2,779,019   
|Total liabilities and shareholders equity                            | $27,293,079   | $25,801,527 









See Notes to Condensed Consolidated Financial Statements.



5



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AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)







|Nine Months Ended September 30,                                                  | 2006          | 2005         
|-------------------------------------------------------------------------------- | ------------- | -------------
|(dollars in thousands)                                                           |               | Restated     
|Cash Flows from Operating Activities
Net income                                  | $     329,541 | $     394,000
|Reconciling adjustments:
Provision for finance receivable losses                 | 121,851       | 254,057      
|Depreciation and amortization                                                    | 106,728       | 120,696      
|Deferral of finance receivable origination costs                                 | (57,630)      | (63,285)     
|Deferred income tax benefit                                                      | (5,660)       | (19,270)     
|Origination of real estate loans held for sale                                   | (6,128,797)   | (363,061)    
|Sales and principal collections of real estate loans held for sale               | 5,516,579     | 214,193      
|Net gain on sales of real estate loans held for sale                             | (94,462)      | (4,845)      
|Change in other assets and other liabilities                                     | 22,718        | (47,837)     
|Change in insurance claims and policyholder liabilities                          | (11,451)      | (18,907)     
|Change in taxes receivable and payable                                           | 1,195         | (29,319)     
|Other, net                                                                       | (6,575)       | (16,258)     
|Net cash (used for) provided by operating activities                             | (205,963)     | 420,164      
|Cash Flows from Investing Activities
Finance receivables originated or purchased | (6,755,153)   | (9,514,568)  
|Principal collections on finance receivables                                     | 6,045,679     | 6,217,631    
|Investment securities purchased                                                  | (153,874)     | (319,160)    
|Investment securities called and sold                                            | 115,316       | 254,031      
|Investment securities matured                                                    | 5,125         | 37,047       
|Change in premiums on finance receivables purchased and
deferred charges         | (711)         | (20,096)     
|Other, net                                                                       | (19,225)      | (18,579)     
|Net cash used for investing activities                                           | (762,843)     | (3,363,694)  
|Cash Flows from Financing Activities
Proceeds from issuance of long-term debt    | 2,211,067     | 4,753,515    
|Repayment of long-term debt                                                      | (2,263,852)   | (1,262,168)  
|Change in short-term debt                                                        | 1,229,570     | (498,681)    
|Capital contribution from parent                                                 | -             | 20,000       
|Dividends paid                                                                   | (229,992)     | (67,999)     
|Net cash provided by financing activities                                        | 946,793       | 2,944,667    
|(Decrease) increase in cash and cash equivalents                                 | (22,013)      | 1,137        
|Cash and cash equivalents at beginning of period                                 | 192,531       | 160,610      
|Cash and cash equivalents at end of period                                       | $     170,518 | $     161,747









See Notes to Condensed Consolidated Financial Statements.



6



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AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)







|                                                                                               | Three Months Ended | Nine Months Ended
|---------------------------------------------------------------------------------------------- | ------------------ | -----------------
|                                                                                               | September 30,      | September 30,    
|(dollars in thousands)                                                                         | 2006               | 2005
Restated    
|Net income                                                                                     | $  93,047          | $123,634         
|Other comprehensive income (loss):
Net unrealized gains (losses) on investment
securities      | 39,426             | (26,566)         
|Net unrealized (losses) gains on swap
agreements                                               | (11,028)           | 16,484           
|Minimum pension liability adjustment                                                           | -                  | -                
|Income tax effect:
Net unrealized (gains) losses on investment
securities                      | (13,799)           | 9,298            
|Net unrealized losses (gains) on swap
agreements                                               | 3,859              | (5,768)          
|Minimum pension liability adjustment                                                           | -                  | -                
|Other comprehensive income (loss), net of
tax, before reclassification adjustments             | 18,458             | (6,552)          
|Reclassification adjustments for realized
losses included in net income:
Investment securities | 158                | 35               
|Swap agreements                                                                                | 1,027              | 758              
|Income tax effect:
Investment securities                                                       | (55)               | (12)             
|Swap agreements                                                                                | (359)              | (266)            
|Realized losses included in net income,
net of tax                                             | 771                | 515              
|Other comprehensive income (loss), net of tax                                                  | 19,229             | (6,037)          
|Comprehensive income                                                                           | $112,276           | $117,597         









See Notes to Condensed Consolidated Financial Statements.



7



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AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2006







Note 1.  Basis of Presentation



American General Finance, Inc. will be referred to as AGFI or collectively with its subsidiaries, whether directly or indirectly owned, as the Company or we. AGFI is an indirect wholly owned subsidiary of American International Group, Inc. (AIG).



We prepared our condensed consolidated financial statements using accounting principles generally accepted in the United States (GAAP). These statements are unaudited. The statements include the accounts of AGFI and its subsidiaries, all of which are wholly owned. We eliminated all material intercompany accounts and transactions. We made all material adjustments, including normal and nonrecurring adjustments, for a fair statement of the Companys condensed consolidated financial statements. You should read these statements in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2005. To conform to the 2006 presentation, we reclassified certain items in the prior period.





Note 2.  Correction of Accounting Errors



We restated our unaudited condensed consolidated financial statements and other financial information at and for the quarters ended March 31, June 30, and September 30, 2005. The restatement related to the correction of errors in our accounting for four cross currency swaps designated as hedges of our foreign currency denominated debt. We included the restated financial information at and for each of the periods being restated in our Annual Report on Form 10-K for the year ended December 31, 2005.



8



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The following tables show the restatement adjustments to our previously reported unaudited condensed consolidated financial data at and for the three and nine months ended September 30, 2005.



Restated

Condensed Consolidated Statement of Income (Unaudited):

|Three Months Ended September 30, 2005         | As Previously |            | As      
|--------------------------------------------- | ------------- | ---------- | --------
|(dollars in thousands)                        | Reported      | Adjustment | Restated
|Revenues
Finance charges                      | $592,662      | $    -     | $592,662
|Mortgage banking                              | 1,418         | -          | 1,418   
|Insurance                                     | 39,334        | -          | 39,334  
|Investment                                    | 21,955        | -          | 21,955  
|Net service fees from affiliates              | 97,855        | -          | 97,855  
|Other                                         | 3,785         | 29,918     | 33,703  
|Total revenues                                | 757,009       | 29,918     | 786,927 
|Expenses
Interest expense                     | 238,625       | (2,957)*   | 235,668 
|Operating expenses:
Salaries and benefits     | 140,758       | -          | 140,758 
|Other operating expenses                      | 77,137        | -          | 77,137  
|Provision for finance receivable losses       | 119,470       | -          | 119,470 
|Insurance losses and loss adjustment expenses | 17,357        | -          | 17,357  
|Total expenses                                | 593,347       | (2,957)    | 590,390 
|Income before provision for income taxes      | 163,662       | 32,875     | 196,537 
|Provision for Income Taxes                    | 61,397        | 11,506     | 72,903  
|Net Income                                    | $102,265      | $21,369    | $123,634



*

Represents the swaps net interest settlements that have been reclassified to other revenue in conjunction with the correction of the accounting.





9



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Restated

Condensed Consolidated Statement of Income (Unaudited):

|Nine Months Ended September 30, 2005          | As Previously |            | As        
|--------------------------------------------- | ------------- | ---------- | ----------
|(dollars in thousands)                        | Reported      | Adjustment | Restated  
|Revenues
Finance charges                      | $1,714,082    | $    -     | $1,714,082
|Mortgage banking                              | 6,870         | -          | 6,870     
|Insurance                                     | 122,652       | -          | 122,652   
|Investment                                    | 64,572        | -          | 64,572    
|Net service fees from affiliates              | 237,225       | -          | 237,225   
|Other                                         | 9,577         | 54,529     | 64,106    
|Total revenues                                | 2,154,978     | 54,529     | 2,209,507 
|Expenses
Interest expense                     | 651,789       | (9,269)*   | 642,520   
|Operating expenses:
Salaries and benefits     | 413,109       | -          | 413,109   
|Other operating expenses                      | 224,588       | -          | 224,588   
|Provision for finance receivable losses       | 254,057       | -          | 254,057   
|Insurance losses and loss adjustment expenses | 50,458        | -          | 50,458    
|Total expenses                                | 1,594,001     | (9,269)    | 1,584,732 
|Income before provision for income taxes      | 560,977       | 63,798     | 624,775   
|Provision for Income Taxes                    | 208,446       | 22,329     | 230,775   
|Net Income                                    | $  352,531    | $41,469    | $  394,000



*

Represents the swaps net interest settlements that have been reclassified to other revenue in conjunction with the correction of the accounting.





10



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Restated

Condensed Consolidated Balance Sheet (Unaudited):

|September 30, 2005                                                    | As Previously |            | As         
|--------------------------------------------------------------------- | ------------- | ---------- | -----------
|(dollars in thousands)                                                | Reported      | Adjustment | Restated   
|Assets

Net finance receivables:
Real estate loans                    | $18,724,784   | $     -    | $18,724,784
|Non-real estate loans                                                 | 3,143,014     | -          | 3,143,014  
|Retail sales finance                                                  | 1,431,392     | -          | 1,431,392  
|Net finance receivables                                               | 23,299,190    | -          | 23,299,190 
|Allowance for finance receivable losses                               | (522,831)     | -          | (522,831)  
|Net finance receivables, less allowance
for finance receivable losses | 22,776,359    | -          | 22,776,359 
|Real estate loans held for sale                                       | 165,151       | -          | 165,151    
|Investment securities                                                 | 1,382,140     | -          | 1,382,140  
|Cash and cash equivalents                                             | 161,747       | -          | 161,747    
|Other assets                                                          | 906,156       | -          | 906,156    
|Total assets                                                          | $25,391,553   | $     -    | $25,391,553
|Liabilities and Shareholders Equity

Long-term debt                  | $17,944,765   | $     -    | $17,944,765
|Short-term debt                                                       | 3,800,404     | -          | 3,800,404  
|Insurance claims and policyholder liabilities                         | 404,050       | -          | 404,050    
|Other liabilities                                                     | 491,019       | -          | 491,019    
|Accrued taxes                                                         | 23,292        | -          | 23,292     
|Total liabilities                                                     | 22,663,530    | -          | 22,663,530 
|Shareholders equity:
Common stock                                    | 1,000         | -          | 1,000      
|Additional paid-in capital                                            | 1,016,305     | -          | 1,016,305  
|Accumulated other comprehensive income                                | 84,662        | (41,469)   | 43,193     
|Retained earnings                                                     | 1,626,056     | 41,469     | 1,667,525  
|Total shareholders equity                                            | 2,728,023     | -          | 2,728,023  
|Total liabilities and shareholders equity                            | $25,391,553   | $     -    | $25,391,553





11



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Restated

Condensed Consolidated Statement of Cash Flows (Unaudited):

|Nine Months Ended September 30, 2005                                             | As Previously |            | As         
|-------------------------------------------------------------------------------- | ------------- | ---------- | -----------
|(dollars in thousands)                                                           | Reported      | Adjustment | Restated   
|Cash Flows from Operating Activities
Net Income                                  | $   352,531   | $41,469    | $   394,000
|Reconciling adjustments:
Provision for finance receivable losses                 | 254,057       | -          | 254,057    
|Depreciation and amortization                                                    | 120,696       | -          | 120,696    
|Deferral of finance receivable origination costs                                 | (63,285)      | -          | (63,285)   
|Deferred income tax benefit                                                      | (41,599)      | 22,329     | (19,270)   
|Origination of real estate loans held for sale                                   | (363,061)     | -          | (363,061)  
|Sales and principal collections of real estate
loans held for sale               | 214,193       | -          | 214,193    
|Net gain on sales of real estate loans held for sale                             | (4,845)       | -          | (4,845)    
|Change in other assets and other liabilities                                     | 15,961        | (63,798)   | (47,837)   
|Change in insurance claims and policyholder liabilities                          | (18,907)      | -          | (18,907)   
|Change in taxes receivable and payable                                           | (29,319)      | -          | (29,319)   
|Other, net                                                                       | (16,258)      | -          | (16,258)   
|Net cash provided by operating activities                                        | 420,164       | -          | 420,164    
|Cash Flows from Investing Activities
Finance receivables originated or purchased | (9,514,568)   | -          | (9,514,568)
|Principal collections on finance receivables                                     | 6,217,631     | -          | 6,217,631  
|Investment securities purchased                                                  | (319,160)     | -          | (319,160)  
|Investment securities called and sold                                            | 254,031       | -          | 254,031    
|Investment securities matured                                                    | 37,047        | -          | 37,047     
|Change in premiums on finance receivables
purchased and deferred charges         | (20,096)      | -          | (20,096)   
|Other, net                                                                       | (18,579)      | -          | (18,579)   
|Net cash used for investing activities                                           | (3,363,694)   | -          | (3,363,694)
|Cash Flows from Financing Activities
Proceeds from issuance of long-term debt    | 4,753,515     | -          | 4,753,515  
|Repayment of long-term debt                                                      | (1,262,168)   | -          | (1,262,168)
|Change in short-term debt                                                        | (498,681)     | -          | (498,681)  
|Capital contributions from parent                                                | 20,000        | -          | 20,000     
|Dividends paid                                                                   | (67,999)      |            | (67,999)   
|Net cash provided by financing activities                                        | 2,944,667     | -          | 2,944,667  
|Increase in cash and cash equivalents                                            | 1,137         | -          | 1,137      
|Cash and cash equivalents at beginning of period                                 | 160,610       | -          | 160,610    
|Cash and cash equivalents at end of period                                       | $   161,747   | -          | $   161,747





12



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Restated

Condensed Consolidated Statement of Comprehensive Income (Unaudited):

|Three Months Ended September 30, 2005                                                          | As Previously |            | As      
|---------------------------------------------------------------------------------------------- | ------------- | ---------- | --------
|(dollars in thousands)                                                                         | Reported      | Adjustment | Restated
|Net income                                                                                     | $102,265      | $ 21,369   | $123,634
|Other comprehensive income (loss):
Net unrealized losses on investment securities              | (26,566)      | -          | (26,566)
|Net unrealized gains on swap agreements                                                        | 46,435        | (29,951)   | 16,484  
|Minimum pension liability adjustment                                                           | -             | -          | -       
|Income tax effect:
Net unrealized losses on investment securities                              | 9,298         | -          | 9,298   
|Net unrealized gains on swap agreements                                                        | (16,251)      | 10,483     | (5,768) 
|Minimum pension liability adjustment                                                           | -             | -          | -       
|Other comprehensive income (loss), net of tax, before
reclassification adjustments             | 12,916        | (19,468)   | (6,552) 
|Reclassification adjustments for realized
losses included in net income:
Investment securities | 35            | -          | 35      
|Swap agreements                                                                                | 3,682         | (2,924)    | 758     
|Income tax effect:
Investment securities                                                       | (12)          | -          | (12)    
|Swap agreements                                                                                | (1,289)       | 1,023      | (266)   
|Realized losses included in net income, net of tax                                             | 2,416         | (1,901)    | 515     
|Other comprehensive income (loss), net of tax                                                  | 15,332        | (21,369)   | (6,037) 
|Comprehensive income                                                                           | $117,597      | $     -    | $117,597





13



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Restated

Condensed Consolidated Statement of Comprehensive Income (Unaudited):

|Nine Months Ended September 30, 2005                                                           | As Previously |            | As      
|---------------------------------------------------------------------------------------------- | ------------- | ---------- | --------
|(dollars in thousands)                                                                         | Reported      | Adjustment | Restated
|Net income                                                                                     | $352,531      | $41,469    | $394,000
|Other comprehensive income:
Net unrealized losses on investment securities                     | (25,462)      | -          | (25,462)
|Net unrealized gains on swap agreements                                                        | 77,037        | (45,585)   | 31,452  
|Minimum pension liability adjustment                                                           | (2,247)       | -          | (2,247) 
|Income tax effect:
Net unrealized losses on investment securities                              | 8,912         | -          | 8,912   
|Net unrealized gains on swap agreements                                                        | (26,961)      | 15,955     | (11,006)
|Minimum pension liability adjustment                                                           | 876           | -          | 876     
|Other comprehensive income, net of tax, before
reclassification adjustments                    | 32,155        | (29,630)   | 2,525   
|Reclassification adjustments for realized
losses included in net income:
Investment securities | 4,251         | -          | 4,251   
|Swap agreements                                                                                | 18,971        | (18,213)   | 758     
|Income tax effect:
Investment securities                                                       | (1,488)       | -          | (1,488) 
|Swap agreements                                                                                | (6,640)       | 6,374      | (266)   
|Realized losses included in net income, net of tax                                             | 15,094        | (11,839)   | 3,255   
|Other comprehensive income, net of tax                                                         | 47,249        | (41,469)   | 5,780   
|Comprehensive income                                                                           | $399,780      | $     -    | $399,780





Note 3.  Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 123R Share-Based Payment. This standard is a revision of SFAS 123 Accounting for Stock-Based Compensation and supersedes Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value. The cost will be recognized over the period during which an employee is required to provide service in exchange for the share-based payment. We participate in AIGs stock-based compensation plans, and AIG allocates to us our share of the calculated costs. Effective January 1, 2006, AIG adopted SFAS 123R utilizing the binominal model to calculate the fair value of stock option grants. The model uses ten years of historical exercise behavior to account for the early exercise of employee options and five years of historical stock price data to infer the implied volatility.



14



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At September 30, 2006, our employees participated in the following stock-based compensation plans:



·

AIG 1999 Stock Option Plan

Certain key employees of AIG and its subsidiaries and members of the AIG Board of Directors can be granted options to purchase a maximum of 45,000,000 shares of AIG common stock in the aggregate at prices not less than fair market value at the grant date. The maximum number of shares that may be granted to any one grantee is limited to 900,000 in any one year. Options generally vest over four years (25 percent vesting per year) and expire 10 years from the date of grant.



·

AIG 2002 Stock Incentive Plan

Equity-based or equity-related awards with respect to shares of AIG common stock can be issued to employees of AIG and its subsidiaries in any year up to a maximum of that number of shares equal to (a) 1,000,000 shares plus (b) the number of shares available but not issued in the prior calendar year. The maximum award that a grantee may receive under the plan per year is rights with respect to 250,000 shares.



·

AIG 1996 Employee Stock Purchase Plan

Eligible employees (those employed at least one year) of AIG and its subsidiaries may be granted the right to purchase up to an aggregate of 10,000,000 shares of AIG common stock at a price equal to 85 percent of the fair market value on the date of the grant of the purchase privilege. Purchase privileges are granted quarterly and are limited to the number of whole shares that can be purchased on an annual basis by an amount equal to the lesser of 10 percent of an employees annual salary or $10,000.



·

SICOs Deferred Compensation Profit Participation Plans

Starr International Company, Inc. (SICO) has provided a series of two-year Deferred Compensation Profit Participation Plans to certain employees of AIG and its subsidiaries (SICO Plans). The SICO Plans provide that shares of AIG common stock currently held by SICO are set aside for the benefit of the participant and distributed upon retirement. The SICO Board of Directors currently may permit an early payout of units under certain circumstances.



·

AIGs 2005-2006 Deferred Compensation Profit Participation Plan (AIG DCPPP)

The AIG DCPPP provides equity-based compensation to key employees of AIG and its subsidiaries. The AIG DCPPP is modeled on the SICO Plans.



·

AIG Partners Plan

The AIG Partners Plan replaces the AIG DCPPP. Stock-based compensation earned under the AIG DCPPP and the AIG Partners Plan is issued as awards under the AIG 2002 Stock Incentive Plan.



Under SFAS 123R, we recorded operating expenses of $1.5 million for the three months ended September 30, 2006 and $4.5 million for the nine months ended September 30, 2006 for our participation in AIGs stock-based compensation plans. In 2005, we recorded operating expenses of $0.5 million for the three months ended September 30, 2005 and $1.6 million for the nine months ended September 30, 2005.



15



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In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken, or expected to be taken, in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and additional disclosures. The effective date of this implementation guidance is January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently assessing the effect of implementing this guidance.



In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently assessing the effect of implementing this standard.



In September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). This standard covers an employers accounting for defined benefit postretirement plans sponsored for employees and requires that an employer that sponsors one or more defined benefit pension or other postretirement plans recognize an asset or liability for the overfunded or underfunded status of the defined benefit postretirement plan. Further, employers will record all unrecognized prior service costs and credits and unrecognized actuarial gains and losses in accumulated other comprehensive income, net of tax. Any transition asset or transition obligation remaining from the initial application of SFAS 87 and 106 will similarly be recognized as a component of other comprehensive income, net of tax. Amounts recognized in accumulated other comprehensive income will be adjusted as they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of SFAS 87 and 106. Prior period financial statements will not be retroactively adjusted and the calculation of the annual expense is unchanged. The statement also requires an employer to measure plan assets and benefit obligations as of the date of the employers statement of financial position. SFAS 158 is effective for us as of December 31, 2006. The majority of the Companys employees participate in various benefit plans sponsored by AIG, including a noncontributory qualified defined benefit retirement plan, and post retirement health and welfare plans. Related plan expenses are allocated to the Company by AIG. The Companys employees in Puerto Rico participate in a defined benefit pension plan sponsored by a subsidiary of AGFC. We are currently assessing the effect of implementing this standard.





Note 4.  Finance Receivables



Components of net finance receivables by type were as follows:



|September 30, 2006                           | Real         | Non-Real     | Retail        |            
|-------------------------------------------- | ------------ | ------------ | ------------- | -----------
|(dollars in thousands)                       | Estate Loans | Estate Loans | Sales Finance | Total      
|Gross receivables                            | $19,119,604  | $3,725,593   | $1,936,432    | $24,781,629
|Unearned finance charges
and points and fees | (169,812)    | (398,197)    | (201,237)     | (769,246)  
|Accrued finance charges                      | 123,125      | 41,216       | 29,645        | 193,986    
|Deferred origination costs                   | 29,358       | 35,077       | -             | 64,435     
|Premiums, net of discounts                   | 60,888       | 224          | (726)         | 60,386     
|Total                                        | $19,163,163  | $3,403,913   | $1,764,114    | $24,331,190



16



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|December 31, 2005                            | Real         | Non-Real     | Retail        |            
|-------------------------------------------- | ------------ | ------------ | ------------- | -----------
|(dollars in thousands)                       | Estate Loans | Estate Loans | Sales Finance | Total      
|Gross receivables                            | $18,948,061  | $3,534,323   | $1,693,710    | $24,176,094
|Unearned finance charges
and points and fees | (147,818)    | (395,076)    | (170,109)     | (713,003)  
|Accrued finance charges                      | 121,562      | 41,467       | 23,912        | 186,941    
|Deferred origination costs                   | 31,452       | 35,430       | -             | 66,882     
|Premiums, net of discounts                   | 71,320       | 798          | (518)         | 71,600     
|Total                                        | $19,024,577  | $3,216,942   | $1,546,995    | $23,788,514





Unused credit limits extended by AIG Federal Savings Bank (AIG Bank), a non-subsidiary affiliate, (whose private label finance receivables are fully participated to the Company) and the Company to their customers were $5.0 billion at September 30, 2006, and $4.1 billion at December 31, 2005. Company experience has shown that the funded amounts have been substantially less than the credit limits. All unused credit limits, in part or in total, can be cancelled at the discretion of AIG Bank and the Company.





Note 5.  Allowance for Finance Receivable Losses



Changes in the allowance for finance receivable losses were as follows:



|                                        | Three Months Ended | Nine Months Ended
|--------------------------------------- | ------------------ | -----------------
|                                        | September 30,      | September 30,    
|(dollars in thousands)                  | 2006               | 2005             
|Balance at beginning of period          | $500,501           | $466,032         
|Provision for finance receivable losses | 39,796             | 119,470          
|Charge-offs                             | (67,533)           | (75,204)         
|Recoveries                              | 11,736             | 12,533           
|Balance at end of period                | $484,500           | $522,831         





Note 6.  Derivative Financial Instruments



Our principal borrowing subsidiary is American General Finance Corporation (AGFC), a wholly owned subsidiary of AGFI. AGFC uses derivative financial instruments in managing the cost of its debt but is neither a dealer nor a trader in derivative financial instruments. AGFCs derivative financial instruments consist of interest rate, foreign currency, and equity-indexed swap agreements.



While all of our interest rate, foreign currency, and equity-indexed swap agreements mitigate economic exposure of related debt, not all of these swap agreements currently qualify as cash flow or fair value hedges under GAAP. At September 30, 2006, equity-indexed debt was immaterial.





Note 7.  Accumulated Other Comprehensive Income



Components of accumulated other comprehensive income were as follows:



|                                              | September 30, | December 31,
|--------------------------------------------- | ------------- | ------------
|(dollars in thousands)                        | 2006          | 2005        
|Net unrealized gains on investment securities | $17,841       | $23,730     
|Net unrealized gains on swap agreements       | 10,621        | 10,499      
|Minimum pension liability adjustment          | (2,906)       | (1,371)     
|Accumulated other comprehensive income        | $25,556       | $32,858     



17



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Note 8.  Segment Information



We have three business segments:  branch, centralized real estate, and insurance. We define our segments by types of financial service products we offer, nature of our production processes, and methods we use to distribute our products and to provide our services, as well as our management reporting structure.



In our branch business segment, we:



·

originate real estate loans secured by first or second mortgages on residential real estate, which may be closed-end accounts or open-end home equity lines of credit and are generally considered non-conforming;

·

originate secured and unsecured non-real estate loans;

·

purchase retail sales contracts and provide revolving retail sales financing services arising from the retail sale of consumer goods and services by retail merchants; and

·

purchase private label receivables originated by AIG Bank under a participation agreement.



To supplement our lending and retail sales financing activities, we purchase portfolios of real estate loans, non-real estate loans, and retail sales finance receivables originated by other lenders. We also offer credit and non-credit insurance and ancillary products to all eligible branch customers.



In our centralized real estate business segment, we:



·

originate real estate loans for sale to investors with servicing released to the purchaser;

·

originate real estate loans for transfer to the centralized real estate servicing center; and

·

service a portfolio of real estate loans generated through:

·

portfolio acquisitions from third party lenders;

·

correspondent relationships;

·

our mortgage origination subsidiaries;

·

refinancing existing mortgages; or

·

advances on home equity lines of credit.



Previously, we provided marketing services, certain origination processing services, loan servicing, and related services for AIG Bank. In first quarter 2006, Wilmington Finance, Inc. and MorEquity, Inc., which are subsidiaries of AGFC, terminated their mortgage services agreements with AIG Bank and began originating non-conforming residential real estate loans under their own state licenses.



In our insurance business segment, we write and reinsure credit life, credit accident and health, credit-related property and casualty, credit involuntary unemployment, and non-credit insurance covering our customers and the property pledged as collateral through products that the branch business segment offers to its customers. We also monitor our finance receivables to ensure that the collateral is adequately protected.



Information about the Companys segments follows:



|Three Months Ended September 30, 2006 |          | Centralized |           | Total   
|------------------------------------- | -------- | ----------- | --------- | --------
|(dollars in thousands)                | Branch   | Real Estate | Insurance | Segments
|Revenues:
External:
Finance charges   | $457,297 | $178,578    | $      -  | $635,875
|Insurance                             | -        | -           | 38,253    | 38,253  
|Other                                 | (2,579)  | 64,926      | 24,129    | 86,476  
|Intercompany                          | 18,260   | 491         | (15,325)  | 3,426   
|Pretax income                         | 94,317   | 28,333      | 27,103    | 149,753 



18



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|Three Months Ended September 30, 2005 |          | Centralized |           | Total   
|------------------------------------- | -------- | ----------- | --------- | --------
|(dollars in thousands)                | Branch   | Real Estate | Insurance | Segments
|Revenues:
External:
Finance charges   | $448,653 | $173,874    | $     -   | $622,527
|Insurance                             | 171      | -           | 39,163    | 39,334  
|Other                                 | (32)     | 98,831      | 22,096    | 120,895 
|Intercompany                          | 18,486   | 462         | (15,640)  | 3,308   
|Pretax income                         | 64,503   | 93,017      | 21,529    | 179,049 





|Nine Months Ended September 30, 2006 |            | Centralized |           | Total     
|------------------------------------ | ---------- | ----------- | --------- | ----------
|(dollars in thousands)               | Branch     | Real Estate | Insurance | Segments  
|Revenues:
External:
Finance charges  | $1,377,126 | $537,542    | $      -  | $1,914,668
|Insurance                            | -          | -           | 115,568   | 115,568   
|Other                                | (10,990)   | 187,103     | 72,817    | 248,930   
|Intercompany                         | 55,338     | 1,495       | (46,381)  | 10,452    
|Pretax income                        | 348,111    | 111,758     | 77,229    | 537,098   





|Nine Months Ended September 30, 2005 |            | Centralized |           | Total     
|------------------------------------ | ---------- | ----------- | --------- | ----------
|(dollars in thousands)               | Branch     | Real Estate | Insurance | Segments  
|Revenues:
External:
Finance charges  | $1,322,938 | $471,345    | $     -   | $1,794,283
|Insurance                            | 518        | -           | 122,134   | 122,652   
|Other                                | (986)      | 242,449     | 71,337    | 312,800   
|Intercompany                         | 57,445     | 1,266       | (48,739)  | 9,972     
|Pretax income                        | 334,957    | 203,106     | 72,373    | 610,436   





Reconciliations of total segment pretax income to the condensed consolidated financial statement amounts were as follows:



|                           | Three Months Ended | Nine Months Ended
|-------------------------- | ------------------ | -----------------
|                           | September 30,      | September 30,    
|(dollars in thousands)     | 2006               | 2005
Restated    
|Pretax income:
Segments    | $149,753           | $179,049         
|Corporate                  | (11,083)           | 16,715           
|Adjustments                | (167)              | 773              
|Consolidated pretax income | $138,503           | $196,537         





Corporate pretax income includes management and administrative revenues and expenses that are not considered pertinent in determining segment performance.



Adjustments for pretax income include realized gains (losses). Adjustments for pretax income in 2005 also included certain other investment revenue.



19



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Note 9.  Legal Contingencies



AGFI and certain of its subsidiaries are parties to various lawsuits and proceedings, including certain purported class action claims, arising in the ordinary course of business. In addition, many of these proceedings are pending in jurisdictions that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts, if any, that will ultimately be paid arising from these lawsuits and proceedings will not have a material adverse effect on our consolidated results of operations or financial position. However, the continued occurrences of large damage awards in general in the United States, including, in some jurisdictions, large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs, create the potential for an unpredictable judgment in any given suit.



20



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Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations.



REPORT OF MANAGEMENTS RESPONSIBILITY



The Companys management is responsible for the integrity and fair statement of our condensed consolidated financial statements and all other financial information presented in this report. We prepared our condensed consolidated financial statements using accounting principles generally accepted in the United States (GAAP) for interim periods. We made estimates and assumptions that affect amounts recorded in the financial statements and disclosures of contingent assets and liabilities.



The Companys management is responsible for designing and maintaining an effective system of internal control over financial reporting. We designed this system to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, that transactions are recorded in accordance with GAAP under managements direction and that financial records are reliable to prepare financial statements. We support the internal control structure with careful selection, training and development of qualified personnel. The Companys employees are subject to AIGs Code of Conduct designed to assure that all employees perform their duties with honesty and integrity. Also, AIGs Director, Executive Officer, and Senior Financial Officer Code of Business Conduct and Ethics covers such directors and officers of AIG and its subsidiaries, including the Companys Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. We do not allow loans to executive officers. The aforementioned system includes a documented organizational structure and policies and procedures that we communicate throughout the Company. Our internal auditors report directly to the Senior Vice President and Director of Internal Audit of AIG to strengthen independence. They continually monitor the operation of our internal controls and report their findings to the Companys management, AIGs management, and AIGs internal audit department. We take prompt action to correct control deficiencies and improve the system.



All internal control structures and procedures for financial reporting, no matter how well designed, have inherent limitations. Even internal controls and procedures determined to be effective may not prevent or detect all misstatements. Changes in conditions or the complexity of compliance with policies and procedures creates a risk that the effectiveness of our internal control structure and procedures for financial reporting may vary over time.



The Companys management, including its Chief Executive Officer and its Chief Financial Officer, evaluates the effectiveness of our disclosure controls and procedures as of the end of each quarter and the changes in internal control over financial reporting for the quarter using the framework and criteria established in Internal Control  Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on an evaluation of the disclosure controls and procedures as of September 30, 2006, the Companys principal executive officer and principal financial officer have concluded that the disclosure controls and procedures have functioned effectively and that the condensed consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented. A material weakness existed as of December 31, 2005 and was remediated in the first quarter of 2006, prior to the filing of our Annual Report on Form 10-K for the year ended December 31, 2005. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2005, we did not maintain effective controls over the accounting for derivatives. Specifically, our controls were not effective in ensuring the proper designation and documentation of our foreign currency swaps, the first of which we entered into in June 2004. As a result of this material weakness, the Companys Chief Financial Officer and Chief Accounting Officer determined that it was necessary to restate our unaudited condensed consolidated financial statements and other financial information at and for the quarters ended March 31, June 30, and September 30, 2005. We included the restated financial information at and for each of the periods being restated in our Annual Report on Form 10-K for the year ended December 31, 2005. We evaluated the effect of correcting the errors related to our original accounting on our previously reported unaudited condensed consolidated financial statements for each quarter in 2004 and on our annual audited consolidated financial statements at and for the year ended December 31, 2004 using qualitative and quantitative factors and determined that the effect was immaterial. We concluded that the cumulative effect of the correction for the year 2004 should be accounted for in the fourth quarter of 2005. There have been no changes in the Companys internal control over financial reporting during the three months ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. Management has also concluded that the Companys condensed consolidated financial statements contained in this report fairly present our consolidated financial position and the results of our operations for the periods presented.



American General Finance, Inc.



21



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FORWARD-LOOKING STATEMENTS



This Quarterly Report on Form 10-Q and our other publicly available documents may include, and the Companys officers and representatives may from time to time make, statements which may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only our belief regarding future events, many of which are inherently uncertain and outside of our control. These statements may address, among other things, our strategy for growth, product development, regulatory approvals, market position, financial results and reserves. Our actual results and financial condition may differ from the anticipated results and financial condition indicated in these forward-looking statements. The important factors, many of which are outside of our control, which could cause our actual results to differ, possibly materially, include, but are not limited to, the following:



·

changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we access capital and invest cash flows from the insurance business segment;

·

changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels and the formation of business combinations among our competitors;

·

the effectiveness of our credit risk scoring models in assessing the risk of customer unwillingness or inability to repay;

·

shifts in collateral values, contractual delinquencies, and credit losses;

·

levels of unemployment and personal bankruptcies;

·

our ability to access capital markets and maintain our credit rating position;

·

changes in laws, regulations, or regulator policies and practices that affect our ability to conduct business or the manner in which we conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products;

·

the costs and effects of any litigation or governmental inquiries or investigations that are determined adversely to the Company;

·

changes in accounting standards or tax policies and practices and the application of such new policies and practices to the manner in which we conduct business;

·

our ability to integrate the operations of any acquisitions into our businesses;

·

changes in our ability to attract and retain employees or key executives to support our businesses;

·

natural or accidental events such as earthquakes, hurricanes, tornadoes, fires, or floods affecting our customers and collateral and our branches or other operating facilities; and

·

war, acts of terrorism, riots, civil disruption, pandemics, or other events disrupting business or commerce.



We also direct readers to other risks and uncertainties discussed in other documents we file with the SEC. We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future events or otherwise.



22



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RESTATEMENT



As previously announced, on March 20, 2006, we determined that it was necessary to restate our unaudited condensed consolidated financial statements and other financial information at and for the quarters ended March 31, June 30, and September 30, 2005. The restatement related to the correction of errors in our accounting for four cross currency swaps designated as hedges of our foreign currency denominated debt, the first of which we entered into in June 2004. As a result, the originally issued unaudited condensed consolidated financial statements and other related financial information for these periods should no longer be relied upon. We included the restated financial information at and for each of the restated periods in our Annual Report on Form 10-K for the year ended December 31, 2005. We have also included the restated financial information at and for the three and nine months ended September 30, 2005 in this report. See Note 2 of the Notes to Condensed Consolidated Financial Statements and Item 4 for further information on this restatement.





Background



In connection with the preparation of our 2005 annual financial statements, we reviewed our existing accounting for cross currency swaps under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, and determined that our four cross currency swaps did not meet the requirements for hedge accounting under SFAS 133. Previously, we had designated these swaps as hedges of changes in foreign exchange rates related to our foreign currency denominated debt (liabilities of the Company). We documented these swaps originally as matched terms hedges, in accordance with paragraph 65 of SFAS 133. However, upon completing our review of these transactions, we concluded that certain significant terms did not meet the requirements of paragraph 65 of SFAS 133. We determined that the hedge documentation, contemporaneously created on the trade date, was not consistent with the requirements to support hedge accounting treatment. The swaps might have qualified for long-haul hedge accounting, with ineffectiveness reflected in current income; however, SFAS 133 does not allow for subsequent documentation modifications. Since these swaps did not qualify for hedge accounting, we recorded all changes in the fair value of each of our cross currency swaps to income.





Effect of the Restatement



The correction of our accounting treatment related to the cross currency swaps did not adversely affect the Companys financial position. The hedge accounting correction had no effect on total shareholders equity but did affect net income. For future periods, we anticipate greater fluctuations in net income as a result of not using hedge accounting for our cross currency swaps.



The effect of the restatement on net income for each of the quarters in 2005 was as follows:



|(dollars in thousands)                | Net Income
Adjustment
|------------------------------------- | ---------------------
|Three Months ended March 31, 2005     | $25,113              
|Three Months ended June 30, 2005      | (5,013)              
|Three Months ended September 30, 2005 | 21,369               
|Nine months ended September 30, 2005  | $41,469              



23



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In addition, net income for the quarter ended December 31, 2005 included $7.6 million related to the correction of cumulative hedge accounting errors under SFAS 133 arising in the quarters ended June 30, September 30, and December 31, 2004 and $5.8 million of other out of period items relating to adjustments in prepaid federal income taxes, state tax reserves, and investment securities that were corrected in fourth quarter 2005 as part of our normal year-end financial reporting process. These errors were immaterial to the unaudited condensed consolidated financial statements for each of the related quarters and to the respective annual audited consolidated financial statements in which the error originated.



The effect of the restatement on the components of shareholders equity was as follows:



|(dollars in thousands) | Retained
Earnings | Accumulated
Other
Comprehensive
Income
|---------------------- | ----------------- | --------------------------------------
|March 31, 2005         | $25,113           | $(25,113)                             
|June 30, 2005          | 20,100            | (20,100)                              
|September 30, 2005     | 41,469            | (41,469)                              





CRITICAL ACCOUNTING ESTIMATES



We consider our most critical accounting estimate to be the establishment of an adequate allowance for finance receivable losses. Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly. The Credit Strategy and Policy Committee exercises its judgment, based on quantitative analyses, qualitative factors, and each committee members experience in the consumer finance industry, when determining the amount of the allowance for finance receivable losses. If its review concludes that an adjustment is necessary, we charge or credit this adjustment to expense through the provision for finance receivable losses. We consider this estimate to be a critical accounting estimate that affects the net income of the Company in total and the pretax operating income of our branch and centralized real estate business segments. We document the adequacy of the allowance for finance receivable losses, the analysis of the trends in credit quality, and the current economic conditions the Credit Strategy and Policy Committee considered to support its conclusions. See Provision for Finance Receivable Losses for further information on the allowance for finance receivable losses.





OFF-BALANCE SHEET ARRANGEMENTS



We do not have any off-balance sheet arrangements as defined by SEC rules.



24



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CAPITAL RESOURCES AND LIQUIDITY



Capital Resources



Our capital varies primarily with the amount of net finance receivables. We base the mix of debt and equity primarily upon maintaining leverage that supports cost-effective funding.



|September 30,
(dollars in millions) | 2006      |         | 2005
Restated
|----------------------------------- | --------- | ------- | -------------
|                                    | Amount    | Percent |              
|Long-term debt                      | $18,464.3 | 70%     |              
|Short-term debt                     | 5,039.0   | 19      |              
|Total debt                          | 23,503.3  | 89      |              
|Equity                              | 2,871.3   | 11      |              
|Total capital                       | $26,374.6 | 100%    |              
|Net finance receivables             | $24,331.2 |         |              
|Debt to equity ratio                | 8.19x     |         |              
|Debt to tangible equity ratio       | 8.97x     |         |              





Short-term debt increased in 2006 primarily to fund the growth in net originations of real estate loans held for sale resulting from the termination of the mortgage services agreements with AIG Bank.



Reconciliations of equity to tangible equity were as follows:



|September 30,                          | 2006     | 2005    
|-------------------------------------- | -------- | --------
|(dollars in millions)                  |          | Restated
|Equity                                 | $2,871.3 | $2,728.0
|Goodwill                               | (224.7)  | (224.7) 
|Accumulated other comprehensive income | (25.6)   | (43.2)  
|Tangible equity                        | $2,621.0 | $2,460.1





We issue a combination of fixed-rate debt, principally long-term, and floating-rate debt, both long-term and short-term. AGFC obtains our fixed-rate funding by publicly issuing long-term debt with maturities generally ranging from three to ten years. AGFC and AGFI obtain most of our floating-rate funding by issuing and refinancing commercial paper and by publicly issuing long-term, floating-rate debt. We issue commercial paper, with maturities ranging from 1 to 270 days, to banks, insurance companies, corporations, and other institutional investors. At September 30, 2006, short-term debt included $4.5 billion of commercial paper. AGFC also issues extendible commercial notes with initial maturities of up to 90 days, which AGFC may extend to 390 days. At September 30, 2006, short-term debt included $444.4 million of extendible commercial notes.



AGFC uses interest rate, foreign currency, and equity-indexed swap agreements in conjunction with specific long-term debt issuances. AGFCs objective is to achieve net U.S. dollar, fixed or floating interest rate exposure at costs not materially different from costs AGFC would have incurred by issuing debt for the same net exposure without using derivatives.



AGFI has historically paid dividends to (or received capital contributions from) its parent to manage our leverage of debt to tangible equity to a targeted amount. The current targeted amount is 9.0 to 1. Certain AGFI and AGFC financing agreements effectively limit the amount of dividends they may pay. AGFIs ability to pay dividends depends on dividends or other funds it receives from its subsidiaries, primarily AGFC.



25



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Liquidity Facilities



We maintain credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. AGFC does not guarantee any borrowings of AGFI.



At September 30, 2006, AGFC had committed credit facilities totaling $4.253 billion, including a $2.125 billion multi-year credit facility and a $2.125 billion 364-day credit facility. The 364-day facility allows for the conversion by the borrower of any outstanding loan at expiration into a one-year term loan. AGFI is an eligible borrower under the 364-day facility for up to $400.0 million. The annual commitment fees for the facilities are based upon AGFCs long-term credit ratings and averaged 0.07% at September 30, 2006. There were no amounts outstanding under these committed credit facilities at September 30, 2006 or 2005.



At September 30, 2006, AGFI and certain of its subsidiaries also had uncommitted credit facilities totaling $195.0 million which could be increased depending upon lender ability to participate its loans under the facilities. Outstanding borrowings under these uncommitted credit facilities totaled $60.0 million at September 30, 2006 and 2005.





Liquidity



Our sources of funds include operations, issuances of long-term debt in domestic and foreign markets, short-term borrowings in the commercial paper market, borrowings from banks under credit facilities, and securitizations. AGFI has also received capital contributions from its parent to support finance receivable growth and maintain targeted leverage.



We believe that our overall sources of liquidity will continue to be sufficient to satisfy our operational requirements and financial obligations. The principal factors that could decrease our liquidity are customer non-payment and an inability to access capital markets. The principal factors that could increase our cash needs are significant increases in net originations and purchases of finance receivables. We intend to mitigate liquidity risk by continuing to operate the Company utilizing the following existing strategies:



·

maintaining a finance receivable portfolio comprised mostly of real estate loans, which generally represent a lower risk of customer non-payment;

·

monitoring finance receivables using our credit risk and asset/liability management systems;

·

maintaining an investment securities portfolio of predominantly investment grade, liquid securities; and

·

maintaining a capital structure appropriate to our asset base.



26



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Principal sources and uses of cash were as follows:



|Nine Months Ended September 30,                                               |           |         
|----------------------------------------------------------------------------- | --------- | --------
|(dollars in millions)                                                         | 2006      | 2005    
|Principal sources of cash:
Net issuances of debt                              | $1,176.8  | $2,992.7
|Operations                                                                    | -         | 420.2   
|Capital contribution                                                          | -         | 20.0    
|Total                                                                         | $1,176.8  | $3,432.9
|Principal uses of cash:
Net originations and purchases of finance receivables | $   709.5 | $3,296.9
|Dividends paid                                                                | 230.0     | 68.0    
|Operations                                                                    | 206.0     | -       
|Total                                                                         | $1,145.5  | $3,364.9





Net originations and purchases of finance receivables and net issuances of debt decreased for the nine months ended September 30, 2006, when compared to the same period in 2005 primarily due to decreases in our centralized real estate loan production caused by a less robust U.S. housing market in 2006 compared to the prior year. Net cash from operations decreased primarily due to an increase in net originations of real estate loans held for sale resulting from the termination of the mortgage services agreements with AIG Bank which had the effect of decreasing service fees from AIG Bank and increasing real estate loans held for sale under our own state licenses.



27



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We believe that consistent execution of our business strategies should result in continued profitability, strong credit ratings, and investor confidence. These results should allow continued access to capital markets to issue our commercial paper and long-term debt. We have implemented programs and operating guidelines to ensure adequate liquidity, to mitigate the impact of any inability to access capital markets, and to provide contingent funding sources. These programs and guidelines include the following:



·

We manage commercial paper as a percentage of total debt. At September 30, 2006, that percentage was 19% compared to 15% at September 30, 2005.

·

We spread commercial paper maturities throughout upcoming weeks and months.

·

We limit the amount of commercial paper that any one investor may hold.

·

We maintain credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. At September 30, 2006, we had $4.253 billion of committed bank credit facilities.

·

At September 30, 2006, AGFC had the corporate authority to issue up to $14.1 billion of senior long-term debt securities registered under the Securities Act of 1933 using AGFCs effective shelf registration statements.

·

We have established AGFC as an issuer in foreign capital markets.

·

We have the ability to sell, on a whole loan basis, or securitize, a portion of our finance receivables.

·

We collect principal payments on our finance receivables, which totaled $8.2 billion during the twelve months ended September 30, 2006. We chose to reinvest most of these collections, plus additional amounts from borrowings, in new finance receivables during this period, but these funds could be made available for other uses, if necessary.

·

We have the ability to sell a portion of our insurance subsidiaries investment securities and to dividend, subject to certain regulatory limits, cash from the securities sales.







ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION





Net Income



|                                   | Three Months Ended | Nine Months Ended
|---------------------------------- | ------------------ | -----------------
|                                   | September 30,      | September 30,    
|(dollars in millions)              | 2006               | 2005
Restated    
|Net income                         | $  93.0            | $123.6           
|Amount change                      | $(30.6)            | $    8.7         
|Percent change                     | (25)%              | 8%               
|Return on average assets           | 1.36%              | 1.96%            
|Return on average equity           | 12.96%             | 18.02%           
|Ratio of earnings to fixed charges | 1.44x              | 1.82x            





See Note 8 of the Notes to Condensed Consolidated Financial Statements for information on the results of the Companys business segments.



28



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Factors that affected the Companys operating results were as follows:



Finance Charges



Finance charges by type were as follows:



|                        | Three Months Ended | Nine Months Ended
|----------------------- | ------------------ | -----------------
|                        | September 30,      | September 30,    
|(dollars in millions)   | 2006               | 2005             
|Real estate loans       | $     407.5        | $     388.9      
|Non-real estate loans   | 177.1              | 161.0            
|Retail sales finance    | 50.0               | 42.8             
|Total                   | $     634.6        | $     592.7      
|Amount change           | $       41.9       | $       85.5     
|Percent change          | 7%                 | 17%              
|Average net receivables | $24,274.0          | $23,127.2        
|Yield                   | 10.38%             | 10.18%           





Finance charges increased due to the following:



|                                    | Three Months Ended | Nine Months Ended
|----------------------------------- | ------------------ | -----------------
|                                    | September 30,      | September 30,    
|(dollars in millions)               | 2006               | 2005             
|Increase in average net receivables | $28.4              | $117.9           
|Change in yield                     | 13.5               | (32.4)           
|Decrease in number of days          | -                  | -                
|Total                               | $41.9              | $  85.5          





Average net receivables by type and changes in average net receivables when compared to the same periods for the previous year were as follows:



|Three Months Ended September 30, | 2006      | 2005     
|-------------------------------- | --------- | ---------
|(dollars in millions)            | Amount    | Change   
|Real estate loans                | $19,205.0 | $   620.8
|Non-real estate loans            | 3,372.2   | 232.9    
|Retail sales finance             | 1,696.8   | 293.1    
|Total                            | $24,274.0 | $1,146.8 
|Percent change                   |           | 5%       





|Nine Months Ended September 30, | 2006      | 2005    
|------------------------------- | --------- | --------
|(dollars in millions)           | Amount    | Change  
|Real estate loans               | $19,162.6 | $1,525.5
|Non-real estate loans           | 3,283.5   | 204.1   
|Retail sales finance            | 1,608.0   | 234.5   
|Total                           | $24,054.1 | $1,964.1
|Percent change                  |           | 9%      



29



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The relatively low interest rate environment, in comparison to historical periods, along with growth in our branch network contributed to the increase in average net receivables. Real estate loan production arising from our centralized real estate origination services represented $1.6 billion of our real estate loan originations during the last twelve months.



Yield by type and changes in yield in basis points (bp) when compared to the same period for the previous year were as follows:



|Three Months Ended September 30, | 2006  | 2005  
|-------------------------------- | ----- | ------
|                                 | Yield | Change
|Real estate loans                | 8.42% | 12  bp
|Non-real estate loans            | 20.91 | 50    
|Retail sales finance             | 11.71 | (40)  
|Total                            | 10.38 | 20    





|Nine Months Ended September 30, | 2006  | 2005  
|------------------------------- | ----- | ------
|                                | Yield | Change
|Real estate loans               | 8.44% | 7  bp 
|Non-real estate loans           | 21.02 | 21    
|Retail sales finance            | 11.49 | (122) 
|Total                           | 10.36 | (1)   





Yield increased for the three months ended September 30, 2006, when compared to the same period in 2005 reflecting higher real estate and non-real estate loan yield, partially offset by lower retail sales finance yield. Yield decreased slightly for the nine months ended September 30, 2006, when compared to the same period in 2005 reflecting lower retail sales finance yield. Retail sales finance yield decreased for the three and nine months ended September 30, 2006, when compared to the same periods in 2005 primarily due to competitive market conditions, which have resulted in a change in the mix to longer term promotional products.





Mortgage Banking Revenues



Mortgage banking revenues were as follows:



|                                                            | Three Months Ended | Nine Months Ended
|----------------------------------------------------------- | ------------------ | -----------------
|                                                            | September 30,      | September 30,    
|(dollars in millions)                                       | 2006               | 2005             
|Net gain (loss) on sales of real estate loans held for sale | $54.3              | $ (0.2)          
|Interest income on real estate loans held for sale          | 23.8               | 1.6              
|Total                                                       | $78.1              | $  1.4           
|Amount change                                               | $76.7              | $  0.3           
|Percent change                                              | N/M                | 28%              



30



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Mortgage banking revenues increased for the three and nine months ended September 30, 2006, when compared to the same periods in 2005 reflecting the termination of the mortgage services agreements with AIG Bank and the resulting increase in originations of real estate loans held for sale. In first quarter 2006, we terminated the mortgage services agreements with AIG Bank (subsequently resulting in lower net service fees from affiliates) and began originating real estate loans held for sale using our own state licenses.





Insurance Revenues



Insurance revenues were as follows:



|                      | Three Months Ended | Nine Months Ended
|--------------------- | ------------------ | -----------------
|                      | September 30,      | September 30,    
|(dollars in millions) | 2006               | 2005             
|Earned premiums       | $38.1              | $39.1            
|Commissions           | 0.2                | 0.2              
|Total                 | $38.3              | $39.3            
|Amount change         | $(1.0)             | $(4.7)           
|Percent change        | (3)%               | (11)%            





Earned premiums decreased for the three and nine months ended September 30, 2006 when compared to the same periods in 2005 primarily due to declining credit premium volume in prior periods. Historically, non-real estate loan customers have purchased the majority of our insurance products. We experienced decreases in the number of non-real estate loan customers in prior periods primarily due to the low mortgage interest rate environment.





Investment Revenue



|                      | Three Months Ended | Nine Months Ended
|--------------------- | ------------------ | -----------------
|                      | September 30,      | September 30,    
|(dollars in millions) | 2006               | 2005             
|Investment revenue    | $23.0              | $22.0            
|Amount change         | $  1.0             | $ (1.9)          
|Percent change        | 5%                 | (8)%             





Investment revenue was affected by the following:



|                                   | Three Months Ended | Nine Months Ended
|---------------------------------- | ------------------ | -----------------
|                                   | September 30,      | September 30,    
|(dollars in millions)              | 2006               | 2005             
|Average invested assets            | $1,446.3           | $1,438.8         
|Investment portfolio yield         | 6.18%              | 6.14%            
|Net realized losses on investments | $     (0.2)        | $      -         



31



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Net Service Fees from Affiliates



|                                 | Three Months Ended | Nine Months Ended
|-------------------------------- | ------------------ | -----------------
|                                 | September 30,      | September 30,    
|(dollars in millions)            | 2006               | 2005             
|Net service fees from affiliates | $    0.7           | $97.9            
|Amount change                    | $(97.2)            | $38.2            
|Percent change                   | (99)%              | 64%              





Net service fees from affiliates decreased for the three and nine months ended September 30, 2006, when compared to the same periods in 2005 reflecting the decrease in AIG Banks origination and sale of real estate loans held for sale using our mortgage origination services caused primarily by the termination of the mortgage services agreements with AIG Bank and a less robust U.S. housing market in 2006 compared to the prior year. In first quarter 2006, we terminated the mortgage services agreements with AIG Bank and began originating real estate loans held for sale using our own state licenses.





Other Revenues



Other revenues were as follows:



|                                           | Three Months Ended | Nine Months Ended
|------------------------------------------ | ------------------ | -----------------
|                                           | September 30,      | September 30,    
|(dollars in millions)                      | 2006               | 2005
Restated    
|Fair value adjustments  derivatives       | $(63.7)            | $ 32.3           
|Writedowns on real estate owned            | (2.2)              | (1.8)            
|Net recovery on sales of real estate owned | 0.8                | 1.2              
|Other                                      | 1.8                | 2.0              
|Total                                      | $(63.3)            | $33.7            
|Amount change                              | $(97.0)            | $33.2            
|Percent change                             | (288)%             | N/M              





Other revenues decreased for the three and nine months ended September 30, 2006 when compared to the same periods in 2005 primarily due to unfavorable variances in fair value adjustments on derivatives.



32



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Interest Expense



The impact of using the swap agreements that qualify as hedges under GAAP is included in interest expense and the related borrowing statistics below. Interest expense by type was as follows:



|                      | Three Months Ended | Nine Months Ended
|--------------------- | ------------------ | -----------------
|                      | September 30,      | September 30,    
|(dollars in millions) | 2006               | 2005
Restated    
|Long-term debt        | $     227.3        | $     194.9      
|Short-term debt       | 79.1               | 40.8             
|Total                 | $     306.4        | $     235.7      
|Amount change         | $       70.7       | $       68.2     
|Percent change        | 30%                | 41%              
|Average borrowings    | $23,578.9          | $21,447.6        
|Interest expense rate | 5.16%              | 4.39%            





Interest expense increased due to the following:



|                                  | Three Months Ended | Nine Months Ended
|--------------------------------- | ------------------ | -----------------
|                                  | September 30,      | September 30,    
|(dollars in millions)             | 2006               | 2005
Restated    
|Increase in interest expense rate | $47.9              | $24.3            
|Increase in average borrowings    | 22.8               | 43.9             
|Total                             | $70.7              | $68.2            





Average borrowings by type and changes in average borrowings when compared to the same periods for the previous year were as follows:



|Three Months Ended September 30, | 2006      | 2005     
|-------------------------------- | --------- | ---------
|(dollars in millions)            | Amount    | Change   
|Long-term debt                   | $17,745.0 | $   403.2
|Short-term debt                  | 5,833.9   | 1,728.1  
|Total                            | $23,578.9 | $2,131.3 
|Percent change                   |           | 10%      





|Nine Months Ended September 30, | 2006      | 2005    
|------------------------------- | --------- | --------
|(dollars in millions)           | Amount    | Change  
|Long-term debt                  | $17,955.6 | $1,959.1
|Short-term debt                 | 5,053.3   | 583.4   
|Total                           | $23,008.9 | $2,542.5
|Percent change                  |           | 12%     



33



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AGFC issued $2.5 billion of long-term debt during the last twelve months. We used the proceeds of these long-term debt issuances to support finance receivable growth and to refinance maturing debt. In first quarter 2006, a consolidated special purpose subsidiary of AGFI recorded $450.6 million of debt issued by a trust that purchased $492.8 real estate loans as part of a securitization. We recorded the transaction as an on-balance sheet secured financing.



Short-term debt average borrowings increased in 2006 primarily to fund the growth in real estate loans held for sale.



Interest expense rate by type and changes in interest expense rate in basis points when compared to the same period for the previous year were as follows:



|Three Months Ended September 30, | 2006  | 2005
Restated
|-------------------------------- | ----- | -------------
|                                 | Rate  | Change       
|Long-term debt                   | 5.09% | 62 bp        
|Short-term debt                  | 5.38  | 142          
|Total                            | 5.16  | 77           





|Nine Months Ended September 30, | 2006  | 2005
Restated
|------------------------------- | ----- | -------------
|                                | Rate  | Change       
|Long-term debt                  | 4.97% | 61 bp        
|Short-term debt                 | 5.06  | 159          
|Total                           | 4.99  | 83           





Short-term market interest rates have risen significantly since mid-2004. Our actual future interest expense rates will depend on general interest rate levels and market credit spreads, which are influenced by our credit ratings and the market perception of credit risk for the Company and possibly our affiliates, including our ultimate parent, AIG.





Operating Expenses



Operating expenses were as follows:



|                                                              | Three Months Ended | Nine Months Ended
|------------------------------------------------------------- | ------------------ | -----------------
|                                                              | September 30,      | September 30,    
|(dollars in millions)                                         | 2006               | 2005             
|Salaries and benefits                                         | $136.7             | $140.8           
|Other                                                         | 77.0               | 77.1             
|Total                                                         | $213.7             | $217.9           
|Amount change                                                 | $   (4.2)          | $  21.5          
|Percent change                                                | (2)%               | 11%              
|Operating expenses as a percentage of
average net receivables | 3.52%              | 3.77%            



34



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Salaries and benefits expenses decreased for the three months ended September 30, 2006 when compared to the same period in 2005 primarily due to a decrease in commissions resulting from lower centralized real estate loan production.





Provision for Finance Receivable Losses



|                                        | Three Months Ended | At or for the
Nine Months Ended
|--------------------------------------- | ------------------ | -------------------------------
|                                        | September 30,      | September 30,                  
|(dollars in millions)                   | 2006               | 2005                           
|Provision for finance receivable losses | $  39.8            | $119.5                         
|Amount change                           | $(79.7)            | $  50.4                        
|Percent change                          | (67)%              | 73%                            
|Net charge-offs                         | $ 55.8             | $  62.7                        
|Charge-off ratio                        | 0.92%              | 1.09%                          
|Charge-off coverage                     | 2.17x              | 2.09x                          
|60 day+ delinquency                     |                    |                                
|Delinquency ratio                       |                    |                                
|Allowance for finance receivable losses |                    |                                
|Allowance ratio                         |                    |                                





Net charge-offs by type and changes in net charge-offs when compared to the same periods for the previous year were as follows:



|Three Months Ended September 30, | 2006   | 2005  
|-------------------------------- | ------ | ------
|(dollars in millions)            | Amount | Change
|Real estate loans                | $16.7  | $  1.4
|Non-real estate loans            | 32.1   | (7.2) 
|Retail sales finance             | 7.0    | (1.1) 
|Total                            | $55.8  | $(6.9)





|Nine Months Ended September 30, | 2006    | 2005    
|------------------------------- | ------- | --------
|(dollars in millions)           | Amount  | Change  
|Real estate loans               | $  43.6 | $  (0.6)
|Non-real estate loans           | 94.4    | (23.7)  
|Retail sales finance            | 22.2    | (2.8)   
|Total                           | $160.2  | $(27.1) 





The improvement in total net charge-offs for the three and nine months ended September 30, 2006, when compared to the same periods in 2005 was primarily due to the improving economy. Real estate loan net charge-offs increased slightly for the three months ended September 30, 2006, when compared to the same period in 2005 primarily due to the maturation of the real estate loan portfolio. Net charge-offs for the nine months ended September 30, 2006, benefited from $5.5 million of non-recurring recoveries recorded in first quarter 2006.



35



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Charge-off ratios by type and changes in charge-off ratios in basis points when compared to the same periods for the previous year were as follows:



|Three Months Ended September 30, | 2006  | 2005  
|-------------------------------- | ----- | ------
|                                 | Ratio | Change
|Real estate loans                | 0.35% | 2   bp
|Non-real estate loans            | 3.82  | (119) 
|Retail sales finance             | 1.66  | (66)  
|Total                            | 0.92  | (17)  





|Nine Months Ended September 30, | 2006  | 2005  
|------------------------------- | ----- | ------
|                                | Ratio | Change
|Real estate loans               | 0.30% | (4) bp
|Non-real estate loans           | 3.85  | (127) 
|Retail sales finance            | 1.85  | (58)  
|Total                           | 0.89  | (25)  





The improvement in the total charge-off ratios for the three and nine months ended September 30, 2006, when compared to the same periods in 2005 was primarily due to the improving economy. Real estate loan charge-off ratio increased slightly for the three months ended September 30, 2006, when compared to the same period in 2005 reflecting the maturation of the real estate loan portfolio. Net charge-offs for the nine months ended September 30, 2006, benefited from $5.5 million of non-recurring recoveries recorded in first quarter 2006.



Delinquency at September 30, 2006, based on contract terms in effect by type and changes in delinquency when compared to September 30, 2005, were as follows:



|September 30,         | 2006   | 2005  
|--------------------- | ------ | ------
|(dollars in millions) | Amount | Change
|Real estate loans     | $303.3 | $27.3 
|Non-real estate loans | 140.1  | (7.1) 
|Retail sales finance  | 33.1   | 1.8   
|Total                 | $476.5 | $22.0 





The increase in real estate loan delinquency at September 30, 2006, was primarily due to the maturation of the real estate loan portfolio. Retail sales finance delinquency at September 30, 2006, increased slightly when compared to September 30, 2005, reflecting growth in retail sales finance receivables.



Delinquency ratios at September 30, 2006, based on contract terms in effect by type and changes in delinquency ratios in basis points when compared to September 30, 2005, were as follows:



|September 30,         | 2006  | 2005  
|--------------------- | ----- | ------
|                      | Ratio | Change
|Real estate loans     | 1.59% | 11  bp
|Non-real estate loans | 3.76  | (50)  
|Retail sales finance  | 1.71  | (29)  
|Total                 | 1.92  | -     



36



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The total delinquency ratio at September 30, 2006, remained the same when compared to September 30, 2005, due to decreases in the non-real estate loan and retail sales finance delinquency ratios, offset by an increase in the real estate loan delinquency ratio. The increase in the real estate loan delinquency ratio at September 30, 2006, when compared to September 30, 2005, reflected the maturation of the real estate loan portfolio.



Many of our customers are non-prime or sub-prime. Current economic conditions, such as interest rate and employment levels, have a direct effect on our customers ability to repay. Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly to determine the appropriate level of the allowance for finance receivable losses. We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. In our opinion, the allowance is adequate to absorb losses inherent in our existing portfolio. The decrease in the allowance for finance receivable losses at September 30, 2006, when compared to September 30, 2005, was due to decreases to the allowance for finance receivable losses through the provision for finance receivable losses reflecting our quarterly evaluation of our loss exposure relating to Hurricane Katrina and the improving economy. In third quarter 2005, we added $56.8 million to our allowance for finance receivable losses in anticipation of additional finance receivable charge-offs resulting from Hurricane Katrina. As a result of our quarterly evaluations of our loss exposure relating to Hurricane Katrina, we reduced our allowance for finance receivable losses by $26.0 million during 2006 ($22.9 million in third quarter 2006) to reflect our current loss exposure.



The decrease in the allowance ratio at September 30, 2006, when compared to September 30, 2005, was primarily due to decreases to the allowance for finance receivable losses reflecting the Hurricane Katrina effect and the improving economy.



Charge-off coverage, which compares the allowance for finance receivable losses to net charge-offs (annualized), improved for the three and nine months ended September 30, 2006, when compared to the same periods in 2005 due to lower net charge-offs, partially offset by a lower allowance for finance receivable losses.





Insurance Losses and Loss Adjustment Expenses



Insurance losses and loss adjustment expenses were as follows:



|                           | Three Months Ended | Nine Months Ended
|-------------------------- | ------------------ | -----------------
|                           | September 30,      | September 30,    
|(dollars in millions)      | 2006               | 2005             
|Claims incurred            | $13.8              | $19.6            
|Change in benefit reserves | (0.9)              | (2.2)            
|Total                      | $12.9              | $17.4            
|Amount change              | $(4.5)             | $(3.9)           
|Percent change             | (25)%              | (18)%            





Insurance losses and loss adjustment expenses decreased for the three and nine months ended September 30, 2006 when compared to the same periods in 2005 primarily due to lower credit and non-credit insurance claims incurred, reflecting the decline in the number of credit and non-credit insurance policies in force.



37



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Provision for Income Taxes



|                           | Three Months Ended | Nine Months Ended
|-------------------------- | ------------------ | -----------------
|                           | September 30,      | September 30,    
|(dollars in millions)      | 2006               | 2005
Restated    
|Provision for income taxes | $  45.5            | $  72.9          
|Amount change              | $ (27.4)           | $    5.7         
|Percent change             | (38)%              | 9%               
|Pretax income              | $138.5             | $196.5           
|Effective income tax rate  | 32.82%             | 37.09%           





Provision for income taxes decreased for the three and nine months ended September 30, 2006 when compared to the same periods in 2005 primarily due to lower pretax income and a lower effective income tax rate. Our effective income tax rate declined for the three and nine months ended September 30, 2006 primarily due to the lower pretax income of a subsidiary operating in a state with a higher tax rate.





Asset/Liability Management



To reduce the risk associated with unfavorable changes in interest rates not offset by favorable changes in yield of our finance receivables, we monitor the anticipated cash flows of our assets and liabilities, principally our finance receivables and debt.We base the mix of fixed-rate and floating-rate debt, in part, on the nature of the finance receivables being supported. We fund finance receivables with a combination of fixed-rate and floating-rate debt and equity. Our real estate loans held for sale are funded primarily with floating-rate debt.



We issue fixed-rate, long-term debt as the primary source of fixed-rate debt. AGFC also alters the nature of certain floating-rate funding by using swap agreements to create synthetic fixed-rate, long-term debt, to limit our exposure to market interest rate increases. Additionally, AGFC has swapped fixed-rate, long-term debt to floating-rate, long-term debt. Including the impact of interest rate swap agreements that effectively fix floating-rate debt or float fixed-rate debt, our floating-rate debt represented40% of our borrowings at September 30, 2006 and 2005. Approximately $854 million of our floating-rate debt at September 30, 2006 was attributed to funding real estate loans held for sale. Adjustable-rate net finance receivables represented 6% of our net finance receivables at September 30, 2006 compared to 13% at September 30, 2005.





38



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Item 4.  Controls and Procedures.





(a)

Evaluation of Disclosure Controls and Procedures



The Companys disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is recorded, processed, summarized and reported within required timeframes. The Companys disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.



The Companys management, including its principal executive officer and principal financial officer, evaluates the effectiveness of our disclosure controls and procedures as of the end of each quarter using the framework and criteria established in Internal Control  Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on an evaluation of the disclosure controls and procedures as of September 30, 2006, the Companys principal executive officer and principal financial officer have concluded that the disclosure controls and procedures have functioned effectively and that the condensed consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.



(b)

Identification of Material Weakness in Internal Control



A material weakness existed as of December 31, 2005 and was remediated in the first quarter of 2006, prior to the filing of our Annual Report on Form 10-K for the year ended December 31, 2005. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2005, we did not maintain effective controls over the accounting for derivatives. Specifically, our controls were not effective in ensuring the proper designation and documentation of our foreign currency swaps, the first of which we entered into in June 2004. As a result of this material weakness, the Companys Chief Financial Officer and Chief Accounting Officer determined that it was necessary to restate our unaudited condensed consolidated financial statements and other financial information at and for the quarters ended March 31, June 30, and September 30, 2005. We included the restated financial information at and for each of the periods being restated in our Annual Report on Form 10-K for the year ended December 31, 2005. We evaluated the effect of correcting the errors related to our original accounting on our previously reported unaudited condensed consolidated financial statements for each quarter in 2004 and on our annual audited consolidated financial statements at and for the year ended December 31, 2004 using qualitative and quantitative factors and determined that the effect was immaterial. We concluded that the cumulative effect of the correction for the year 2004 should be accounted for in the fourth quarter of 2005.



39



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(c)

Remediation of Material Weakness



In the first quarter of 2006, management took the following actions to remediate this weakness:



·

Management established enhanced procedures to be performed by accounting personnel over documentation, evaluation, and classification of new hedge relationships.

·

Management and accounting personnel involved in derivative transactions will perform quarterly reviews of the derivative portfolio to ensure that acceptable methods for measuring hedge effectiveness are utilized.

·

Management will review the effect of new interpretations and accounting changes with respect to the application of hedge accounting on existing significant hedging relationships quarterly.

·

All hedge accounting policies, strategies, and transactions will be approved by the Chief Financial Officer after consultation with financial management at AIG.



(d)

Changes in Internal Control over Financial Reporting



There have been no changes in the Companys internal control over financial reporting during the three months ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.







PART II  OTHER INFORMATION





Item 1.  Legal Proceedings.





On January 30, 2006, a federal court jury in Long Island, New York rendered a verdict in favor of HSA Residential Mortgage Services of Texas, Inc. (RMST), a subsidiary of AGFI, on its aiding and abetting fraud claim against the State Bank of Long Island (SBLI). The claim arose out of SBLIs involvement with Island Mortgage Network, Inc., a mortgage originator that defrauded RMST and others in 2000 and prior periods. The trial resulted in a judgment of $43.9 million in favor of RMST. SBLI filed a motion for a new trial and on September 28, 2006, the district court denied SBLIs motion for judgment as a matter of law or in the alternative for a new trial. The court has yet to rule on RMSTs request for an award of attorney fees as an additional part of its compensatory damages. As a result of the September 28, 2006, ruling, we expect the court to enter final judgment in favor of RMST, which, with attorneys fees (if granted) and prejudgment interest, is expected to exceed $70 million. SBLI has indicated it intends to appeal the case to the Second Circuit Court of Appeals. We have not recorded this legal contingency.



See Note 9 of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q for additional information on legal proceedings.







Item 6.  Exhibits.





Exhibits are listed in the Exhibit Index beginning on page 42 herein.



40



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Signature





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





|      | AMERICAN GENERAL FINANCE, INC. |                                                                                                            
|----- | ------------------------------ | -----------------------------------------------------------------------------------------------------------
|      |                                | (Registrant)                                                                                               
|Date: | November 13, 2006              |                                                                                                            
|      |                                |                                                                                                            
|      |                                | Senior Vice President and Chief Financial
Officer
(Duly Authorized Officer and Principal
Financial Officer)



41



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Exhibit Index





Exhibit



(12)

Computation of Ratio of Earnings to Fixed Charges



(31.1)

Rule 13a-14(a)/15d-14(a) Certifications of the President and Chief Executive Officer of American General Finance, Inc.



(31.2)

Rule 13a-14(a)/15d-14(a) Certifications of the Senior Vice President and Chief Financial Officer of American General Finance, Inc.



(32)

Section 1350 Certifications







42