UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

or

For transition period from                                         to                                        

Commission file number: 1-15168

CERIDIAN CORPORATION

Registrant’s telephone number, including area code: (952) 853-8100

Former name, former address and former fiscal year if changed from last report: Not Applicable

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 o NO þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES þ NO o

The number of shares of registrant’s Common Stock, par value $.01 per share, outstanding as of July 31, 2004, was 149,047,195.

CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004

INDEX

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FORM 10-Q

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FORM 10-Q

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FORM 10-Q

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004

STOCKHOLDERS’ EQUITY

COMPREHENSIVE INCOME (LOSS)

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

INTRODUCTION

In the opinion of Ceridian Corporation, the unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments, except as set forth in the notes to consolidated financial statements) necessary to present fairly our financial position as of June 30, 2004, and results of operations for the three and six month periods and cash flows for the six month periods ended June 30, 2004 and 2003. Results of operations and cash flows for the 2003 periods have been restated as described in the accompanying note entitled “Restatement of Prior Period Financial Statements.” The results of operations for the six month period ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year.

RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS

As described in Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Form 10-K/A”), we have restated our consolidated financial statements for the years 1999 through 2003 and for the first quarter of 2004 (the “Restatement”). This Note should be read in conjunction with Note B, “Restatement of Financial Statements” in the notes to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2003 Form 10-K/A, which we are filing concurrently with this Form 10-Q and which provides further information on the nature and impact of the Restatement.

The determination to restate prior period financial statements was made as a result of:

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

2002 and 2001 in light of our conclusion that our interest rate and fuel price derivative contracts did not satisfy the requirements of Statement of Financial and Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) and as such, did not qualify for hedge accounting treatment.

The Restatement included the following classes of adjustments:

In addition, certain amounts in other notes to our consolidated financial statements within this Form 10-Q have been restated to reflect the Restatement adjustments.

The adjustments that had the most significant effect on our consolidated statements of operations related to the capitalization and expensing of software development costs (net of amortization effects) and the recent change in accounting for interest rate and fuel price derivative instruments.

The adjustments for capitalization and expensing of software development costs (net of amortization effects) largely resulted in the charging to expense of previously capitalized software costs, including the reversal of related amortization expense. The adjustments resulted in a decrease in pre-tax earnings of $5.6 in the second quarter of 2003 and $6.9 for the six months ended June 30, 2003.

In January 2005, we determined that our interest rate and fuel price derivative contracts did not satisfy the requirements of FAS 133, and as such, did not qualify for hedge accounting treatment. The correction of accounting for these derivative instruments affected the timing of gain or loss recognition on our consolidated statements of operations. The unrealized gains and losses previously reported under hedge accounting treatment in accumulated other comprehensive income within stockholders’ equity on our consolidated balance sheets are now reported in net earnings on our consolidated statements of operations. The pre-tax earnings impact of the correction of unrealized gains and losses on derivative instruments was an increase of $5.5 for the second quarter of 2003 and $4.7 for the six months ended June 30, 2003. The correction of accounting for realized gains and losses had no effect on pre-tax earnings but did require us to reclassify the realized gains and losses from revenue to costs and expenses. As a result of the Restatement, both realized and unrealized gains or losses on interest rate and fuel price derivative instruments now appear on our consolidated statements of operations in a line item entitled “(gain) loss on derivative instruments.”

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

The effect of the Restatement on the consolidated statements of operations for the three and six months ended June 30, 2003 is shown in an accompanying table. The primary impact of the Restatement on the historical consolidated balance sheets and consolidated statements of cash flows related to the adjustments concerning software capitalization and amortization changes. We restated the consolidated balance sheet as of December 31, 2003 in the 2003 Form 10-K/A. As a result of expensing software development costs previously capitalized, net cash provided by operating activities was reduced by $8.0 for the six months ended June 30, 2003. The change had no impact on historical cash balances or net cash flows since the entire reduction in operating cash flows is offset by the reduction in capital expenditures included in investing cash flows. The effect of the Restatement on the consolidated statement of cash flows for the six months ended June 30, 2003 is shown in an accompanying table. The correction of the number of dilutive shares used for earnings per share calculations reduced weighted average diluted shares by 501,000 for the three months ended June 30, 2003 and 296,000 for the six months ended June 30, 2003 due to the addition of the tax benefit from appreciation in value to the proceeds from the assumed exercised stock options.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

The following table presents the effect of the Restatement on the consolidated statements of operations:

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

The following table presents the effect of the Restatement on the consolidated statement of cash flows:

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a Statement of Financial Accounting Standards entitled “Share-Based Payment, an amendment of FASB Statements No. 123 and 95” (“FAS 123R”). The principal effect of FAS 123R will be to require the inclusion in our earnings of a compensation expense for stock option grants and employee stock plan purchases that previously was only reported as a disclosure in a note to our consolidated financial statements. FAS 123R will become effective for our quarterly report for the period ended September 30, 2005. We are presently studying FAS 123R and believe that the compensation expense that would be determined as a result of adoption of its provisions would not differ materially from the amounts previously presented in the notes to our consolidated financial statements.

OTHER EXPENSE (INCOME)

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

In January 2004, we committed to the internal development of a replacement for our Human Resource Solutions LifeWorks customer management system as a result of the failure of an external contractor to meet our requirements for such a project. In connection with our restatement of software development costs described in an accompanying note, we recorded an asset write-down of $2.3 in the first quarter of 2004 representing the carrying value of the capitalized software related to work performed by the external contractor that was abandoned and determined to have no future value to us.

EMPLOYEE PLANS

Stock Plans

We account for our stock-based compensation plans under the intrinsic method of Accounting Principles Board Opinion No. 25 and related Interpretations. We are also required on an interim basis to disclose the pro forma effects on reported net earnings and earnings per share that would have resulted if we elected to use the fair value method of accounting for stock-based compensation. This disclosure is presented in the accompanying table. We employ the Black-Scholes-Merton option pricing model to determine the fair value of stock option grants and employee stock purchase plan purchases.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

EMPLOYEE PLANS (Continued)

Retirement Plans

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) was enacted, which introduces a Medicare prescription drug benefit, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. On May 19, 2004, the FASB issued Financial Staff Position (“FSP”) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” to discuss certain accounting and disclosure issues raised by the Medicare Act. FSP 106-2 addresses accounting for the federal subsidy for the sponsors of single employer defined benefit postretirement healthcare plans and disclosure requirements for such plans. Except for certain nonpublic entities, FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004 or upon earlier adoption if elected.

We have concluded that the prescription drug benefits provided under our postretirement plan are actuarially equivalent to the Medicare benefit as necessary to qualify for the subsidy and have elected to apply FSP 106-2 in the second quarter of 2004. The adoption of FSP 106-2 reduced our accumulated postretirement benefits obligation by $4.8, which will reduce our future postretirement liability and net periodic postretirement benefit lost by approximately $0.6 on an annual basis. The amount of the reduction recorded in the second quarter of 2004 was $0.2.

The components of net periodic pension cost for our defined benefit pension plans and for our postretirement benefit plans are included in the following tables.

INVESTING ACTIVITY

Derivative Instruments

During the reported periods we maintained interest rate contracts to mitigate interest rate risk in our customer funds and corporate cash portfolios. These derivative instruments provide that if one-month LIBOR is below a floor, the counterparty makes a payment to us. Likewise, if one-month LIBOR is above a cap, we make a payment to the counterparty. These payments increase or decrease (gain) loss on derivative instruments in our consolidated statements of operations. Counterparties are all commercial banks with debt ratings of A or better.

The fair market value of these interest rate derivative instruments is reported in the noncurrent asset section of our consolidated balance sheets. The fair market value decreased from $55.7 at December 31, 2003 to $35.0 at June 30, 2004. This decrease in value was primarily due to collections of cash payments from counterparties of $16.0 during the first six months of 2004. Unrealized gains and losses due to changes in the fair value of derivative instruments are reflected in (gain) loss on derivative instruments in our consolidated statements of operations.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

INVESTING ACTIVITY (Continued)

In March 2004, Comdata executed diesel fuel price derivative contracts to limit the effect on earnings related to the variability of Comdata revenue from customer contracts in which Comdata fees are determined as a percentage of pump fuel prices. These contracts, which have the effect of reducing the exposure to price variability of diesel fuel by approximately one half of the expected change in total Comdata revenue due to changes in diesel fuel prices, effectively establish an average fixed price of $1.51 per gallon of diesel fuel for the effected transactions during the period from July 1 to December 31, 2004. The impact of both realized and unrealized gains and losses on the fuel price derivative instruments is reflected in (gain) loss on derivative instruments in our consolidated statements of operations. These contracts are recorded as a liability of $0.9 at June 30, 2004.

See Note A, “Accounting Policies - Cash and Investments, including Derivatives” and Note B, “Restatement of Financial Statements” in the notes to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2003 Form 10-K/A for a further discussion of the reclassification of realized and unrealized gains and losses on derivative instruments as part of the Restatement.

Investments

At December 31, 2003, we held 750,000 shares of The Ultimate Software Group, Inc. (“Ultimate”) common stock and a warrant to purchase an additional 75,000 Ultimate common shares at a price of $4.00 per share. In March 2004, we sold 50,000 shares of Ultimate for $0.7 and a net gain of $0.5. In June 2004, we sold 106,600 shares of Ultimate for $1.3 and a net gain of $0.9. Our holdings of Ultimate as of June 30, 2004 included 593,400 shares and the warrant. In addition, we held 782,069 common shares of U.S.I. Holdings Corporation (“USIH”) at December 31, 2003 and 421,311 shares of USIH at June 30, 2004. In June 2004, we sold 360,758 shares of USIH for $5.7 and a net gain of $2.1. Gains and losses on sales of marketable securities are reported in other expense (income) in our consolidated statements of operations. Proceeds from the June 2004 sales of Ultimate and USIH shares were received in July 2004 and were carried as other receivables at June 30, 2004.

The Ultimate and USIH securities are treated as “available for sale” securities. The carrying value of these securities has been adjusted at each balance sheet date to reflect the market price reported by the stock exchange that lists those securities. The amount of this change is reported as unrealized gain or loss from marketable securities in accumulated other comprehensive income. The carrying values of our holdings of Ultimate amounted to $6.5 at June 30, 2004 and $6.9 at December 31, 2003. The carrying values of our holdings of USIH amounted to $6.7 at June 30, 2004 and $10.2 at December 31, 2003. At June 30, 2004, the net unrealized gain on marketable securities amounted to $4.1, after reduction for deferred income taxes of $2.4, and is reported in accumulated other comprehensive income. This compares to a net unrealized gain on marketable securities of $3.9, after reduction for deferred income taxes of $2.4, at December 31, 2003.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

INVESTING ACTIVITY (Continued)

During the first six months of 2004, net investing cash outflows included $11.0 for the April acquisition of Recruiting Solutions International, Inc. (“RSI”), a provider of web-based recruiting products. The acquisition resulted in the recording of $10.1 of goodwill and intangible assets. RSI’s revenue for its most recent fiscal year was $5.5. We also acquired a customer base for COBRA services from a major insurance company for $0.9 near the end of the first quarter of 2004.

FINANCING

Debt Instruments

In June 2002, Comdata entered into a $150.0 receivables securitization facility with a three-year term that uses selected Comdata trade receivables as collateral for borrowings. The interest rate on this facility is based on the lender’s commercial paper rate plus program fees, which approximates LIBOR plus 0.5% per annum. The amount outstanding under this facility was $140.0 at December 31, 2003, which we reduced to $130.0 in June 2004. The aggregate amount of receivables serving as collateral amounted to $180.3 at June 30, 2004 and $187.0 at December 31, 2003. The amounts outstanding as long-term debt and the collateralized receivables remain on our consolidated balance sheet since the terms of the facility permit us to repurchase the receivables and are classified as noncurrent since we have the intent and the ability to maintain the amount outstanding beyond the next 12 months.

The domestic revolving credit facility that we initiated in January 2001 provides up to $350.0 for a combination of advances and up to $50.0 of letters of credit until March 2006 at an interest rate of 1% per annum over LIBOR. At June 30, 2004 and December 31, 2003, we had utilized $2.3 of the facility for letters of credit and had unused borrowing capacity under the domestic revolving credit facility of $347.7, which we have also designated as backup to the Comdata receivables securitization facility.

In May 2004, Ceridian Centrefile replaced its £3.0 million overdraft facility with a £6.5 million overdraft facility available through February 2005 at an interest rate of 1% per annum over the bank’s base rate (5.25% per annum at June 30, 2004) and used drawings on this facility to retire an intercompany note due to Ceridian Canada. The amount outstanding under Ceridian Centrefile’s borrowing arrangements amounted to $10.1 at June 30, 2004 and $2.7 at December 31, 2003.

Our capital lease obligations for equipment amounted to $18.9 at June 30, 2004 and $20.8 at December 31, 2003.

We were in compliance with covenants under our credit facilities at June 30, 2004. We amended our domestic revolving credit facility and Comdata receivables securitization facility to allow additional time to deliver this report and our Form 10-Q for the third quarter of 2004 to our lenders without the delayed delivery constituting a default under these agreements.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

FINANCING (Continued)

Equity Instruments

During the first six months of 2004, we paid $80.3 to repurchase 4,012,400 shares of our common stock on the open market at an average net price of $20.01 per share. As of June 30, 2004, we may repurchase up to 6,350,500 additional shares of our common stock under an existing authorization from our board of directors. We generally use our treasury stock to address our obligations under our stock compensation and employee stock purchase plans.

CUSTOMER FUNDS

Customer funds are invested in high quality collateralized short-term investments or money market mutual funds as well as long-term debt securities issued by U.S. or Canadian governments and agencies, AAA-rated asset-backed securities and corporate securities rated A3/A- or better.

Effective May 1, 2004, we transferred our investments of customer funds from the “held-to-maturity” category to the “available-for-sale” category in order to provide additional flexibility in managing credit risks for this portfolio. As a result, investments of customer funds are reported at fair value rather than amortized cost at all dates subsequent to the change. The after tax impact of unrealized gains and losses resulting from periodic revaluation of these securities are reported as accumulated other comprehensive income in stockholders’ equity.

At the date of the change in category, the fair value of investments of customer funds exceeded the related amortized cost by $17.6. This change resulted in a net of tax unrealized gain of $11.3 in accumulated other comprehensive income.

Investment income from investments of customer funds includes the yield on these securities as well as realized gains and losses upon disposition and constitutes a component of our compensation for providing services under agreements with our customers. Investment income from investment of customer funds included in revenue for the periods ended June 30, 2004 and 2003 amounted to $17.8 and $16.7 for the quarterly periods and $35.7 and $33.4 for the year-to-date periods. Sale of customer funds securities during the quarter ended June 30, 2004 resulted in a net realized gain of $0.1 on a specific identification basis. The average cost basis of invested customer funds amounted to $2,540.2 and $2,662.8 for the three and six month periods ended June 30, 2004 and $2,265.3 and $2,343.5 for the comparative periods of 2003.

The following tables provide information on amortized cost and fair value for selected classifications of investments of customer funds and amounts by maturity date. The value reported in the consolidated balance sheet is indicated by the asterisk. None of the securities that constituted the unrealized loss have been in an unrealized loss position continuously for twelve months or longer.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

CUSTOMER FUNDS (Continued)

Investments of Customer Funds at June 30, 2004

Investments of Customer Funds at December 31, 2003

Investments of Customer Funds by Maturity Date

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

CAPITAL ASSETS

Amortization for other intangible assets held at June 30, 2004 is estimated to be $17.0 for 2004, $15.6 for 2005, $13.3 for 2006, $10.9 for 2007 and $6.3 for 2008.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
(Unaudited)

SEGMENT DATA

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CERIDIAN CORPORATION AND SUBSIDIARIES

SUBSEQUENT EVENTS

Disposal of SourceWeb Assets

On December 31, 2004, we sold certain customer relationships and other assets associated with our SourceWeb payroll platform (the “SourceWeb Assets”) to RSM McGladrey Employer Services, Inc. (“RSM”) for $4.0 pursuant to the terms and conditions of an Asset Purchase Agreement. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” we recorded a $9.1 pre-tax impairment charge on assets associated with this platform representing the excess of net book value of the SourceWeb Assets over sale proceeds. The impaired assets primarily consist of a purchased software license from Ultimate and capitalized software development costs. In addition to this asset impairment, we also recorded a $19.5 pre-tax loss on disposal which comprises the fair value of the future minimum royalty obligations to Ultimate of $19.3 and $0.2 of employee severance costs.

SourceWeb is a payroll platform within the small business division of our HRS business segment. Pursuant to the terms of the Asset Purchase Agreement, we will provide certain transitional and third party services to RSM for up to nine months.

Change in Measurement Date for U.S. Retirement Plans

In December 2004, we determined that the measurement date for the two defined benefit pension plans and the postretirement health and life insurance plans for U.S. employees should be changed from September 30 to December 31. The later measurement date would permit the use of more current data and coincide with the end of our reporting year. An accounting change of this nature requires a letter of preferability from our independent registered public accounting firm, which we are pursuing. The change, if approved, would result in a reduction in 2004 net periodic pension cost of approximately $3.9 and a 2004 cumulative gain from change in accounting principle of approximately $0.9.

Disposition of Interest Rate Derivative Instruments

On February 3, 2005, we disposed of our interest rate derivative instruments for cash proceeds of $21.0 and recorded a loss of $2.3 on the disposition.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Ceridian Corporation contained in this report that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “ likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements. Forward-looking statements are based on current expectations and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements. Important factors known to us that could cause such material differences are identified and discussed from time to time in our filings with the Securities and Exchange Commission and later in this Quarterly Report on Form 10-Q, under the heading “Cautionary Factors That Could Affect Future Results.”

You should carefully consider each cautionary factor and all of the other information in this report. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any future disclosure we make on related subjects in future reports to the SEC.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004

MANAGEMENT SUMMARY

This discussion should be read in conjunction with (i) the accompanying consolidated financial statements and related notes to such financial statements included in Part I, Item 1, “Financial Statements” of this Form 10-Q and (ii) the consolidated financial statements and related notes to such financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2003 10-K/A, which we are filing concurrently with this report. We have restated our consolidated financial statements for the three and six month periods ended June 30, 2003 as described in the note to the consolidated financial statements entitled “Restatement of Prior Period Financial Statements” contained in this report. All applicable disclosures in the following discussion have been modified to reflect the Restatement, as described below under “Results of Operations - Restatement of Prior Periods.”

Operations

Ceridian Corporation provides human resource solutions to employers through our HRS business segment operations located in the United States, Canada and the United Kingdom. We also provide transaction processing and related services primarily to the transportation and retail industries through our Comdata business segment operations located principally in the United States.

Our net earnings for the second quarter of 2004 amounted to $4.9 million, or 3¢ per diluted share, compared to net earnings of $25.0 million, or 17¢ per diluted share, in the same quarter of 2003. Our revenue for the second quarter of 2004 amounted to $316.5 million compared to $291.1 million in the same quarter of 2003. For the year-to-date periods ended June 30, our net earnings in 2004 amounted to $28.4 million, or 19¢ per diluted share, on revenue of $630.4 million compared to net earnings of $52.3 million, or 35¢ per diluted share, on revenue of $598.0 million in 2003. The comparisons of net earnings between these reporting periods were significantly affected by the decrease in the carrying value of our interest rate derivative instruments, which are required to be marked-to-market on a current basis and the resulting gain or loss recognized on our consolidated statements of operations. During the first half of 2004, rising interest rates and the expectation of future rate increases resulted in a reduction of the carrying value of these instruments, which we reported as a loss on derivative instruments of $5.3 million. The offsetting benefit of rising interest income due to rising interest rates is recognized in revenue in future periods if market expectations are realized. Market expectations for lower future interest rates during the first half of 2003 resulted in a gain on derivative instruments of $19.2 million.

Further information on our consolidated financial condition and results of operations, including business segment operating results, appear in the following sections of this discussion.

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CERIDIAN CORPORATION AND SUBSIDIARIES
FORM 10-Q
June 30, 2004

     Financial Condition