Part 1

Financial Information

Aon Corporation

Condensed Consolidated Statements of Financial Position

See the accompanying notes to the condensed consolidated financial statements.

2

Aon Corporation

Condensed Consolidated Statements of Income

(Unaudited)

See the accompanying notes to the condensed consolidated financial statements.

3

Aon Corporation

 Condensed Consolidated Statements of Cash Flows

 (Unaudited)

See the accompanying notes to condensed consolidated financial statements.

4

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.             Statement of Accounting Principles

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include all normal recurring adjustments which Aon Corporation (“Aon”) considers necessary for a fair presentation.  Operating results for the second quarter and six months ended June 30, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007.

Refer to the consolidated financial statements and notes in the Annual Report on Form 10-K for the year ended December 31, 2006 for additional details of Aon’s financial position, as well as a description of Aon’s accounting policies, which have been continued without material change, except as described in Note 13.

2.                                       New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value.  Statement No. 159 is effective for fiscal years beginning after November 15, 2007 and early adoption is permitted.  The impact of Statement No. 159 on Aon has not yet been determined.

3.             Stock Compensation Plans

Aon’s Stock Incentive Plan (as amended and restated) provides for the grant of non-qualified and incentive stock options, stock appreciation rights, restricted stock and restricted stock units (“RSUs”).  The annual rate at which awards are granted each year is based upon financial and competitive business conditions.

Compensation expense

Stock based compensation expense recognized during 2007 and 2006, which includes RSUs, stock options, performance plan awards and stock purchases related to the Employee Stock Purchase Plan, are based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.  Stock-based compensation expense recognized in Aon’s condensed consolidated statements of income includes compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of Statement No. 123, and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of Statement No. 123(R).  Because stock-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.  Statement No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The following table summarizes stock-based compensation expense related to all share-based payments recognized in the condensed consolidated statements of income in compensation and benefits (in millions):

5

Stock Awards

Stock awards, in the form of RSUs, are granted to certain executives and key employees of Aon.  Prior to 2006, RSUs granted to employees were service-based.  Beginning with awards granted in 2006, awards to employees may consist of both performance-based RSUs and service-based RSUs.  For service-based awards, employees are generally required to complete three continuous years of service before stock awards begin to vest in increments until the completion of a 10-year period of continuous employment.  Beginning in 2002, a large number of awards have been granted that vest in various patterns over five years from the date of grant.  For most employees, individual incentive compensation over $50,000 is paid partially in RSUs, which vest over three years.  In general, most stock awards are issued as they become vested.  In years prior to 2006, in certain circumstances, an employee was able to elect to defer the receipt of vested shares to a later date.  With certain limited exceptions, any break in continuous employment will cause forfeiture of all unvested awards.  The compensation cost associated with each stock award is deferred and amortized over the period of continuous employment using the straight-line method.  Dividend equivalents are paid on certain service-based RSUs.

In 2007 and 2006, performance-based RSUs were granted to certain executives and key employees, whose vesting is contingent upon meeting various individual, divisional or company-wide performance goals, including revenue generation or growth in revenue, pretax income or earnings per share over a one- to five-year period.  Aon accounts for these awards as performance condition RSUs.  The performance condition is not considered in the determination of grant date fair value of these awards.  Compensation cost is recognized over the performance period, and in certain cases an additional vesting period, based on management’s estimate of the number of units expected to vest.  Compensation cost will be adjusted to reflect the actual number of shares paid out at the end of the programs.  The payout of shares under these performance-based plans may range from 0-200% of the number of units granted, based on the plan.  Dividend equivalents are not paid on the performance-based RSUs.

Information regarding Aon’s performance-based plans follows (shares in thousands, dollars in millions):

6

A summary of the status of Aon’s non-vested stock awards is as follows (shares in thousands):

Stock Options

Options to purchase common stock are granted to certain executives and key employees of Aon and its subsidiaries, generally at 100% of market value on the date of grant.  Generally, employees are required to complete two continuous years of service before the options begin to vest in increments until the completion of a 4-year period of continuous employment.  However, beginning in 2004 a significant number of options were granted that required five continuous years of service before all options would vest.  For all grants made prior to an amendment to the former stock option plan in 2000, employees were required to complete three continuous years of service before the options began to vest in increments until the completion of a 6-year period of continuous employment.  The maximum contractual term on stock options is generally ten years from the date of grant.

Upon the adoption of Statement No. 123(R) on January 1, 2006, Aon changed its method of valuation for stock options granted beginning in 2006 to a lattice-binomial option-pricing model from the Black-Scholes option-pricing model, which was previously used for Aon’s pro forma information required under Statement No. 123.  Lattice-based option valuation models utilize a range of assumptions over the expected term of the options.  Expected volatilities are based on the average of the historical volatility of Aon’s stock price and the implied volatility of traded options and Aon’s stock.  Aon uses historical data to estimate option exercise and employee terminations within the valuation model, stratifying between executives and key employees.  The expected dividend yield assumption is based on the company’s historical and expected future dividend rate.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.  The weighted average assumptions, the weighted average expected life and estimated fair value of employee stock options are summarized as follows:

7

A summary of the status of Aon’s stock options and related information is as follows (shares in thousands):

The weighted average remaining contractual life, in years, of outstanding options was 5.4 years and 5.7 years at June 30, 2007 and 2006, respectively.

The aggregate intrinsic value represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $42.61 as of June 30, 2007, which would have been received by the option holders had those option holders exercised their options as of that date.  At June 30, 2007, the aggregate intrinsic value of options outstanding was $355 million, of which $201 million was exercisable.

The aggregate intrinsic value of options exercised during the second quarter and six months ended June 30, 2007 were $40 million and $59 million, respectively, and for the second quarter and six months ended June 30, 2006 were $12 million and $41 million, respectively.

Unamortized deferred compensation expense, which includes both options and awards, amounted to $370 million as of June 30, 2007, with a remaining weighted-average amortization period of approximately 2.8 years.

Cash received from the exercise of stock options was $139 million and $95 million during the six months ended June 30, 2007 and 2006, respectively.  The tax benefit realized from stock options exercised in the first six months of 2007 and 2006 was $25 million and $21 million, respectively.

During the first six months ended June 30, 2007, a majority of option exercises and award vestings were satisfied through the reissuance of treasury shares.

8

4.             Income Per Share

Income per share is calculated as follows:

Certain common stock equivalents related to options were not included in the computation of diluted net income per share because those options’ exercise price was greater than the average market price of the common shares.  The number of options excluded from the quarterly calculation was 7 million and 5 million at June 30, 2007 and 2006, respectively.  For six months ended June 30, 2007 and 2006, the number of options excluded was 7 million and 4 million, respectively.

During the second quarter 2007, certain holders of Aon’s $300 million 3.5% convertible debt securities due November 2012 converted their holdings into Aon common stock.  $57 million was converted, resulting in the issuance of approximately 2.7 million shares.

9

5.             Comprehensive Income

The components of comprehensive income, net of tax, are as follows:

The components of accumulated other comprehensive loss, net of tax, are as follows:

6.             Business Segments

Aon classifies its businesses into three operating segments: Risk and Insurance Brokerage Services, Consulting, and Insurance Underwriting.  Unallocated income and expense, when combined with the operating segments and after the elimination of intersegment revenues, totals to the amounts in the accompanying condensed consolidated financial statements.

The Risk and Insurance Brokerage Services segment consists primarily of Aon’s retail and reinsurance brokerage operations, as well as related insurance services, including underwriting management, captive insurance company management services, and premium financing.  The Consulting segment provides a full range of consulting services delivered predominantly to corporate clientele utilizing seven major practices: employee benefits, compensation, management consulting, communications, strategic human resource consulting, financial advisory and litigation consulting, and human resource outsourcing.  The Insurance Underwriting segment provides specialty insurance products including accident, health and life insurance coverages as well as select property and casualty insurance products.  Aon has ceased writing property and casualty business and has placed the remaining lines of business into runoff.  Unallocated income consists of investment income from equity, fixed-maturity and short-term investments that are assets primarily of the insurance underwriting subsidiaries that exceed policyholders liabilities.  These assets include non-income producing equities, and income and losses on disposals of essentially all securities, including those pertaining to assets maintained by the operating segments.  Unallocated expenses include administrative costs not attributable to the operating segments, such as corporate governance costs.  Interest expense represents the cost of worldwide debt obligations.

10

The accounting policies of the operating segments are the same as those described in this Form 10-Q and Aon’s Annual Report on Form 10-K for the year ended December 31, 2006, except that the disaggregated financial results have been prepared using a management approach, which is consistent with the basis and manner in which Aon senior management internally disaggregates financial information for the purpose of assisting in making internal operating decisions.  Aon evaluates performance based on stand-alone operating segment income before income taxes and generally accounts for intersegment revenue as if the revenue were from third parties, that is, considered by management to be at current market prices.

Revenues are generally attributed to geographic areas based on the location of the resources producing the revenues.  Intercompany revenues and expenses are eliminated in computing consolidated revenues and income before tax.

Revenue by subsegment is as follows:

11

Aon’s operating segments’ geographic revenue and income before income tax is as follows:

A reconciliation of segment income before income tax to income from continuing operations before provision for income tax is as follows:

12

7.             Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair market value of net assets acquired.  Goodwill is allocated to Aon’s various reporting units, which are either its operating segments or one reporting level below the operating segments.  Goodwill is not amortized but is subject to impairment testing at least annually.   When a business entity is sold, goodwill is allocated to the disposed entity based on the fair value of that entity compared to the fair value of the reporting unit in which it is included.

The changes in the net carrying amount of goodwill by operating segment for the six months ended June 30, 2007 are as follows:

Other intangible assets are classified into three categories:

·                  “Customer Related and Contract Based” include client lists as well as non-compete covenants;

·                  “Present Value of Future Profits” represent the future profits of purchased books of business of the insurance underwriting subsidiaries; and

·                  “Marketing, Technology and Other” are all other purchased intangibles not included in the preceding categories.

Other intangible assets by asset class are as follows:

Amortization expense for intangible assets for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 is estimated to be $40 million, $35 million, $33 million, $29 million and $24 million, respectively.

13

8.             Restructuring Charges

2005 Restructuring Plan

In 2005, the Company commenced a broad restructuring initiative that is expected to result in cumulative pretax charges totaling approximately $365 million, including workforce reductions, lease consolidation costs, asset impairments and other expenses necessary to implement the restructuring initiative.  Costs related to the restructuring are included in compensation and benefits, other general expenses and depreciation and amortization in the accompanying condensed consolidated statements of income.

The following is a summary of second quarter and six months 2007, as well as inception to date, restructuring and related expenses by type incurred and estimated to be incurred through the end of the restructuring initiative:

The following is a summary of restructuring and related expenses incurred and estimated to be incurred by segment through the end of the restructuring initiative:

14

The following table sets forth the activity related to the 2005 restructuring plan liabilities:

Restructuring Charges — Prior Years

In 1996 and 1997, Aon recorded restructuring liabilities as a result of the acquisition of Alexander and Alexander Services, Inc. (“A&A”) and Bain Hogg.  During second quarter and six months 2007, Aon made payments of $1 million and $3 million, respectively, for these liabilities.  In the second quarter, the Company determined that certain of these reserves were no longer required.  Accordingly, the Company recorded an adjustment to decrease the restructuring reserve and the corresponding goodwill that was established when the transaction occurred in 1997.  The remaining liability of $12 million is primarily for lease abandonments and is being paid out over several years, as planned.

Aon’s unpaid liabilities are included in general expense liabilities in the condensed consolidated statements of financial position.

9.             Capital Stock

During the first six months of 2007, Aon issued 295,000 new shares of common stock for employee benefit plans and 98,000 shares in connection with the employee stock purchase plans.  In addition, Aon reissued 6.2 million shares of treasury stock for employee benefit programs and 131,000 shares in connection with the employee stock purchase plans.

During the second quarter 2007, certain holders of Aon’s $300 million 3.5% convertible debt securities due November 2012 converted their holdings into Aon common stock.  $57 million was converted, resulting in the issuance of approximately 2.7 million shares.

In November 2006, Aon announced that its Board of Directors had increased the authorized repurchase program to $2 billion.  Shares may be repurchased through the open market or in privately negotiated transactions from time to time, based on prevailing market conditions and will be funded from available capital.  Any repurchased shares will be available for use in connection with employee stock plans and for other corporate purposes.  The Company repurchased approximately 6.7 million shares at a total cost of $279 million in second quarter 2007.  For the first six months of 2007, the Company repurchased approximately 16.2 million shares at a cost of $625 million.

There are also 22.4 million shares of common stock held in treasury at June 30, 2007 which are restricted as to their reissuance.

15

10.           Disposal of Operations

Continuing Operations

In second quarter 2007, Aon sold Media Professionals, Inc., a managing general underwriter, which was included in the Risk and Insurance Brokerage Services segment.  A pretax gain of $26 million was recognized on this sale, which was included in other general expenses in the condensed consolidated statement of income.  Aon has a continuing revenue sharing agreement with the disposed business, and therefore this business does not qualify as a discontinued operation.  Also in second quarter 2007, Aon sold 25% of its Botswana subsidiary, which is included in the Risk and Insurance Brokerage Services segment.  A pretax gain of $4 million was recognized on the sale, which also was included in other general expenses.

Discontinued Operations

In 2006, Aon sold the following businesses:

·                  Aon Warranty Group (“AWG”) and its worldwide warranty and credit operations, which was previously included in the Insurance Underwriting segment.  Included in discontinued operations was pretax income of $21 million and $47 million for the three and six months ended June 30, 2006.  A pretax gain of $16 million was recognized on the sale in fourth quarter 2006.

·                  Construction Program Group (“CPG”), a managing general underwriter whose policies were underwritten by Aon’s property and casualty operation.  Results of CPG were previously included in both the Risk and Insurance Brokerage Services and Insurance Underwriting segments.  A pretax gain of $27 million was recognized on the sale in fourth quarter 2006.

·                  A non-core Australian brokerage unit, which was previously included in the Risk and Insurance Brokerage Services segment.  A pretax gain of $1 million was recognized on the sale in first quarter 2006.

Aon’s insurance subsidiaries are involved in both the cession and assumption of reinsurance with other companies.  Aon’s reinsurance consists primarily of certain newer accident and health initiatives, as well as certain property and casualty lines that are in runoff.  Aon’s insurance subsidiaries remain liable to the extent that the reinsurers are unable to meet their obligations.  In connection with the sale of AWG, Aon sold Virginia Surety Company (“VSC”).  VSC will continue to remain liable to policyholders to the extent reinsurers of the property and casualty business do not meet their obligations.  As a result, Aon no longer reports reinsurance recoverables related to its property and casualty business, which was not part of the sale of AWG.  Aon has provided a corporate guarantee with respect to these reinsurance recoverables, which amounts to $976 million at June 30, 2007.

A&A Discontinued Operations

Prior to its acquisition by Aon, A&A discontinued its property and casualty insurance underwriting operations in 1985, some of which were then placed into run-off, with the remainder sold in 1987.  In connection with those sales, A&A provided indemnities to the purchaser for various estimated and potential liabilities, including provisions to cover future losses attributable to insurance pooling arrangements, a stop-loss reinsurance agreement and actions or omissions by various underwriting agencies previously managed by an A&A subsidiary.

16

As of June 30, 2007, the liabilities associated with the foregoing indemnities were included in other liabilities in the condensed consolidated statements of financial position.  Such liabilities amounted to $78 million.  Reinsurance recoverables and other assets related to these liabilities are $91 million.  The remaining insurance liabilities represent estimates of known and future claims expected to be settled over the next 20 to 30 years, principally with regard to asbestos, pollution and other health exposures.  Although these insurance liabilities represent a best estimate of the probable liabilities, adverse developments may occur given the nature of the information available and the variables inherent in the estimation processes.

The operating results of all these businesses are classified as discontinued operations, and prior year’s operating results have been reclassified to discontinued operations, as follows: