Will try to keep it short.

purchased a house in Mar 1999. House built in 1988. Discovered
termites in July 2003 in our attached garage. Upon inspection,
realized house had been previously treated for termites in the garage.
Called previous owners, they said it was treated in March of 1997. I
called the company that treated it in 1997 and asked them to come out
to give me a price on treating. They said they show no record of
treating this house, but since it had been treated (you can see the
drill holes in the concrete floor and in the bricks around the house),
they would give me a reduced rate of $1542 to treat. Standard rate
was about $2100. The inspector told me about the holes in the bricks,
I had never noticed them. He commented that they were drilled too
high up the wall.

Tonight, I removed the paneling from the garage walls and discovered
extensive termite damage. Most of the studs have some damage, several
with termite damage all the way up to the ceiling. I have a bonus
room over the garage so I am concerened about the structural integrity
of the house.

The pest control company says they did not treat the house, the
previous owners have a copy of the renewal bill in 1998, the year
after treating. I realize it has been 6 years since treatment, but
this infestation has been going on for years.

Also, one important point, I used this company in 1999 to do the
termite inspection when I bought the house. They checked the box "No
visible evidence of infestation from wood-destroying insects was
observed."
The instruction on the sheet (Official North Carolina Wood-Destroying
Insect Information Report) states
"If there is a evidence of a previous or an active infestation of
subterranean termites and/or other wood-destroying insects in the
wooden members, it must be assumed that there is some damage to the
wooden members caused by this infestation, no matter how slight. If
this is the case, the structural integrity of this property should be
evaluated by a qualified building expert. (For the purpose of
completing the report, "infestation" means evidence of past or present
activity by a wood-destroying insect visible in, on, or under a
structure, or in or on debris under the structure.)"

Shouldn't the presence of drill holes in the concrete and the bricks
have been evidence of previous treatment?
If not, since they are the company that treated 2 years before this
inspection, shouldn't that be evidence of infestation. They
obviously knew about the infestation when they treated the house. I
think since they treated the house for termites 2 years before this
inspection, they should have checked the box stating "Visible evidence
of a previously treated infestation, which now appears to be
inactive"? This is assuming it was under control which clearly it
was not.

Also, isn't the previous owners bound by law to disclose the previous
problem with termites?

Any suggestions or advice will be greatly appreciated.