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Updated from 1:48 p.m. EST



said Tuesday the Canadian government has found fault with the terms of services that it provided to the country's department of national defense, and that Ottawa won't pay the bills until it completes an audit.

H-P revealed in its annual report, filed with the

Securities and Exchange Commission

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, that the government of Canada gave notice of the cost audits on Aug. 1, 2003. Canada believes it may have been either overcharged under the contracts or that it may not have received value for items it was billed for, or both.

The cost audits related to contracts with both Compaq Canada and Hewlett-Packard (Canada). The two companies were combined in spring 2002 following the acquisition of Compaq by H-P.

Until the audit is done, the Canadian government won't pay any outstanding bills related to the contacts. H-P said it's cooperating fully with the audit.

H-P declined to assign a specific financial value to the contracts in question. "Though H-P has a very large presence in Canada, the total business volume with the Canadian federal government is relatively small compared to the consumer, small and medium business and commercial markets. And this is one contract within our portfolio of federal government business," said Rob Ireland, manager of corporate relations for H-P Canada.

In other news from H-P's annual report, it said it made pension and postretirement contributions of about $1.2 billion in fiscal 2003 and estimates it will chip in another $1 billion during fiscal 2004.

H-P shares fell 45 cents, or 1.8%, to $25.07 Tuesday.