ENHANCED SERVICES CO INC, 10KSB, 1998-03-09

ENHANCED SERVICES CO INC
10KSB, 1998-03-09
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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended November 30, 1997

Commission file number 0-24256

ENHANCED SERVICES COMPANY, INC.
(Name of small business issuer in its charter)

COLORADO 84-1075908
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

16000 BARKERS POINT LANE, HOUSTON, TX 77079 (281) 556-5051
(Address of principal executive offices) (Zip Code) (Issuer's telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value

Check whether the issuer (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 X No

The Issuer's revenues for the fiscal year ended November 30, 1997
were $5,689,074

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained herein, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

As of March 3 1998, the aggregate market value of the Common Stock of
the Registrant held by non-affiliates of the Registrant was $2,119,588 based on
the closing price of the Common Stock as reported by the NASDAQ Stock Market,
Inc. of $4.75. After giving effect to the additional 220,000 shares of common
stock referred to herein,1,346,474 shares of $.001 par value Common Stock of the
Registrant will be outstanding.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

Enhanced Services Company, Inc. (the "Company") provides (1) repair and
maintenance, upgrade, fulfillment and related technical and asset management
services for users of portable computers, (2) certain enhancement, accessory or
peripheral products for portable computer manufacturers, distributors, dealers
and users, and (3) digital multimedia development services for marketing, sales,
training, entertainment, technical reference, archival storage and other
applications. The Company's portable computer services and products are provided
through its wholly-owned Laptop Solutions-Texas and -California subsidiaries,
and its multimedia services are offered through its wholly-owned NB Engineering,
Inc. (d/b/a NB Digital Solutions) subsidiary.

Historically, most of the Company's revenues have been derived from
portable computer services. It offers repair services as an authorized warranty
provider for Toshiba, Compaq, Panasonic, IBM, and Texas Instruments, as well as
non-warranty repairs on most other portable computers. The Company also upgrades
laptop/notebook hard drive, processors and RAM. Its asset management services
include managing, tracking, replacing, inventorying and logistical support of
its customers' portable computers as well as end-of-life retirement and
refurbishment programs. Pre-delivery preparation and integration services
include the installation and testing of accessories, peripherals and
enhancements from various manufacturers, and by performing custom software
loads, custom data loads and burn-in of hardware, the Company sets up and
delivers portable computers to its customers individual requirements. The
Company's Solutions Engineering Division designs, engineers, manufactures,
installs and sells portable computer accessories, peripherals and enhancements
for its customers' specific field automation projects. The Company's C/VAR
2000(TM) anti-reflective film application is designed to greatly improve screen
readability in sun and direct light conditions.

Multimedia services include specialized digital video services to the
corporate and entertainment markets. In the corporate markets, services offered
by the Company include CD-ROM title development, data compilation and synthesis
of its customers' CD-ROM titles, with interactive features (such as touch
screen, intelligent data branching, viewer testing and speech input), for use in
training, marketing, archival storage and other purposes as well as Digital
Versatile Disk (DVD-ROM) title authoring and development. The services are
offered on a custom basis by the Company, whose engineers and technicians work
with its customers' content editors, creative artists, directors and producers.
After a presentation has been fully developed, whether with the Company or
independently by the customer, it must be fully digitized and compressed in
order to be distributed on CD-ROM, DVD-ROM or other PC-based media. For the
entertainment industry, the Company "format authors" (premaster film, video and
interactive multimedia applications) its customers' films, using the compression
standard known as Digital Versatile Disk ("DVD-VIDEO"). DVD-Video allows a full
length motion picture to be stored on a 5.25" optical disc at broadcast quality
video and Dolby AC-3 quality surround sound stereo. It is the newest industry
standard for home delivery of full length digitized motion pictures. The Company
format authored its first full-length movies in 1997.

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The Company, a Colorado corporation organized in 1987, acquired Laptop
Solutions Inc., a Texas corporation, from Kenneth M. Duckman on September 30,
1992, and Mr. Duckman became the Company's President and Chief Executive
Officer, a director of the Company and its controlling stockholder. The Company,
in March 1995, formed its wholly owned subsidiary, Laptop Solutions, Inc. a
California Corporation. The Company acquired NB Engineering, Inc., a Delaware
corporation, on May 31, 1995 from a corporation of which Ralph LaBarge was the
largest stockholder, and Mr. LaBarge became President and Chief Executive and
Technical Officer of NB Engineering and a director and, beneficially, a
stockholder of the Company. See Item 11, "Security Ownership of Certain
Beneficial Owners and Management."

PORTABLE COMPUTER SERVICES

The Company's portable computer support and maintenance services include
assisting customers who need to put hundreds, and in some cases thousands, of
laptop computers into their field force by providing related engineering and
pre-delivery setup and configuration services as well as asset management and
maintenance support for the deployed units. Most of the Company's customers for
repair and maintenance and field automation related services are medium to large
sized companies. The Company through its Laptop Solutions subsidiaries offers
portable computer services and products. It maintains a dedicated Web server
that can be accessed at http://www.laptopsolutions.com

SUPPORT AND MAINTENANCE SERVICES. The Company's support and contract
maintenance services include warranty repair services as an authorized warranty
provider for Toshiba, Compaq, Panasonic, IBM, NEC and Texas Instruments, as well
as non-warranty repair services on most other portable computers. The Company
has the internal ability to repair LCD's (color and monochrome) and plasma
display screens for portable computers at a cost typically below replacement
cost. The Company's asset management services include managing the rollout,
tracking, fulfillment and logistical and technical support of its customers'
portable computers in the field, as well as designing and fulfilling
end-of-life, retirement and refurbishment programs. The Company also offers a
variety of hard drive, processor and RAM upgrade services and products

FULFILLMENT SERVICES. Through its pre-delivery setup and configuration
fulfillment services, the Company delivers portable computers set up by the
Company to meet its customers' specific requirements. These services include
initial receipt of the customers' computers, accessories, peripherals and
enhancements from the various manufacturers, integration and testing of each
item, custom software loads, custom data loads, burn-in of hardware, testing of
software, and fulfillment to the end user, with full reports back to the
customer.

CUSTOM ENGINEERING SERVICES AND PRODUCTS. Services offered by the
Company's Solutions Engineering Division include the design, engineering,
manufacture, integration and sale of portable computer accessories, peripherals
and enhancements for its' customers' field automation projects. It has received
an initial order for wireless modems, custom designed by the company from a
major Laptop computer manufacturer. Management believes that many of the skills
and disciplines required for its custom engineering services enable the Company
to develop, both internally and with the assistance of outside engineering when
necessary, "shrink-wrap" products for the broader market.

COMPATIBILITY PLUS(TM) The Company's Compatibility Plus(TM) removable
hard drive pak has a

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current capacity of up to 5 gigabytes, for certain Toshiba Tecra(TM) laptops.
The Company is exploring the introduction of additional products. There can be
no assurances, however, that additional products will be developed or
introduced.

C/VAR 2000(TM) ANTI-REFLECTIVE AND INCREASED CONTRAST AND LUMINANCE LCD
FILM. High resolution multi-color LCD screens used in most portables today are
highly reflective and difficult to read when in direct sunlight or strong
incandescent lighting conditions. This problem creates a significant
disadvantage for police forces, emergency services, hospital workers, real
estate agents, insurance adjusters, utility inspectors and military users. The
Company holds a non-exclusive (but, management believes, presently sole) license
to apply a film, manufactured by its licensor, designed to reduce an LCD
screen's reflectivity and glare thereby increasing its contrast ratio and
luminance. Application of this LCD film product requires a manufacturing process
in a clean environment. Management estimates that a significant number of
portable computers are used in such direct light conditions.

MULTIMEDIA SERVICES

Users of the Company's multimedia services are usually medium to large
companies with requirements for the development of digital multimedia
presentations utilizing computer and or entertainment technology. They typically
lack the requisite in-house technological expertise and equipment, or find it
more economical and timely to retain an outside firm with such capabilities to
prepare such presentations. Multimedia services are offered by NB Digital
Solutions, the d/b/a of the company's NB Engineering subsidiary.

DIGITAL VIDEO COMPRESSION SERVICES. The Company's digital video
compression service entails a two-step process in which images (movie or still)
and sound are first converted and then compressed into a digital format that can
be stored and accessed using computer technology. Digital video compression
enables the customer to store, access and play back digitized visual images
using its personal computers. Digital Versatile Disk-Video (DVD-Video), the
recently introduced consumer video format, enables a full length motion picture
to be delivered to the consumer market on a single optical disc with very high
quality video and audio. Management believes NB Engineering has the skills
necessary to "format author" (premaster film, video and interactive multimedia
applications) titles, and it format authored its first full-length movies in
1997. Digital Versatile Disk-ROM (DVD-ROM), the recently introduced computer
based data storage format, enables large quantities of digital multimedia
content data to be placed on a single optical disc with very high quality video
and audio as well as large amounts of raw data. Management believes NB
Engineering has the skills necessary to "author" (premaster data and multimedia
content) and program interactivity features as well as design and implement
database programs and interfaces necessary to delivering a complete DVD-ROM
title. The company authored its first DVD-ROM and DVD-Video/DVD-ROM ("hybrid")
titles in 1997.

MULTIMEDIA DEVELOPMENT SERVICES. The Company offers custom development
services to customers who have digital image processing requirements that cannot
be met with commercially available products. These services include assisting a
customer with the design, development, integration, installation and testing of
custom hardware and software items to meet its individual

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requirements. Examples of such customized development services are: (1)
MULTIMEDIA CD-ROM TITLE DEVELOPMENT: Company develops custom multimedia CD-ROM
titles for use by customers for sales force automation, product brochures and
interactive training; and (2) WORLD WIDE WEB HOME PAGE DEVELOPMENT: It maintains
a dedicated Web server that can be accessed at http://www.nbdig.com.

DVD HYBRID TITLES. The Company has been developing relationships with
content owners to develop its own DVD hybrid titles for release to the market.
To date, NB has developed two such relationships of which one title was
developed and scheduled to be released to the general market at the end of
February 1998. The title, in a co-publishing arrangement with Mill Reef
Entertainment is entitled Earthlight and consists of video licensed from NASA
and original music composed for Mill Reef is able to be played on both DVD-Video
and DVD-ROM players, with near universal compatibility. The company believes
that it will be the first title of its type available to consumers. NB will also
be marketing this title to equipment manufacturers as a bundled software title
for mass distribution.

CUSTOMERS

The Company has established a broad base of customers, representing a wide
range of industries throughout North America, with a small percentage of sales
generated overseas. Revenues from these customers are generally initiated by
different operational groups within the customer organization. No customer
accounted for more than 15% of the Company's revenue during its fiscal year
ended November 30, 1996 or November 30, 1997. The Company offers 30 day net
terms only to its most credit-worthy customers.

SUPPLIERS

The Company purchases hard disks, expansion boards, RAM chips, custom
cables and other components, and licenses software, from a variety of
manufacturers and distributors, and it is dependent on no one source.
Company-designed sub-components utilized in its upgrade services, such as
mounting brackets, short-run boards and custom cables, are manufactured by
sub-contractors to the Company's design and specifications or assembled by the
Company.

SALES, MARKETING, AND DISTRIBUTION

The Company provides portable computer upgrade, repair and management
services and customized multimedia services. It seeks to become a strategic
supplier to its customers and to differentiate itself from its competitors by
offering a higher level of service. The Company has trained sales personnel,
engineers and technicians who are dedicated to working with customers and to
deliver service in a cost effective and timely fashion. The Company believes
that the technical services provided by its personnel are an important factor in
its sales of digital video compression and custom development services.

The Company sells its laptop enhancement and repair services directly
through a combination of customer service representatives and outside sales
staff. The Company also solicits business by advertising regularly in selected
trade publications, visits, the World Wide Web, mail, telephone and it attends
several large trade shows each year.

COMPETITION

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The portable computer enhancement and repair market is highly competitive.
While the Company is unaware of any dominant competitors in the portable
computer upgrade industry, there are few obstacles to market entry and
penetration other than minimal capitalization and the development of the
technological know-how. As a result, it must be anticipated that competitors and
potential competitors will focus future attention on the market with greater
resources than those of the Company. While management believes that its services
offer superior price/performance and are well positioned in terms of market
recognition, it is possible that technological breakthroughs will enable a
competitor or potential competitor to enter the market and be in a position to
challenge the Company in its specialty niche markets.

Competition in the repair and maintenance of laptops and notebooks is
widespread. Many regional and local firms are authorized to provide warranty and
non-warranty service and maintenance for laptops and notebooks. The Company
considers it a competitive advantage that its repairs are typically completed
within a short time of receipt of the damaged unit. The Company believes that
they are well positioned to be competitive because of its technical capabilities
and because it has the infrastructure for rapid turnaround times, a high
priority to the laptop and notebook user.

The digital video compression, DVD format authoring and custom engineering
development services market is also highly competitive. There are several
companies that compete directly in the digital video compression market and
offer compression services similar to those offered by the Company. Although no
one competitor is dominant, there are four major competitors in the digital
video compression market, including the Company. The Company's three major
competitors providing digital video compression services are Horizons
Technology, Inc., CD Archives Interactive, and Advanced Media Concepts. Horizon
Technology's compression division is part of a larger company, with
significantly greater financial, marketing, and technical resources than the
Company. Additional competition comes from several dozen small digital video
compression service centers located throughout the country. In addition to
direct competition, the Company competes with its customers' ability to perform
portions of the required compression process in house, many of which have
in-house capability to perform digital video compression services. In some
cases, the Company's customers perform the work in-house, rather than use an
off-site digital video compression service provider.

The DVD-Video format authoring market is characterized by competition for large
companies such as IBM Interactive Media, Warner California Video and
MCA-Universal DV Computing Center, as well as small competitors such as Laser
Pacific, Allpost and RADCO. The company competes in this market by offering
greater flexibility in pricing and services as well as a higher level of
personal customer service than many of its competitors. THE DVD-ROM MARKET is
new and the company currently has no knowledge of any competitors who are
currently in the market. There have been indications of larger organization
considering entry into this market however, unlike the DVD-Video segment, the
barriers to entry into the DVD-ROM market are significantly greater in terms of
the technical knowledge required as well as the relationships with the corporate
users who are likely to be early adopters of the technology.

The custom development services industry is highly fragmented, with
competition from large, medium and small companies. The larger companies,
including IBM, Arthur Andersen and others,

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generally concentrate on multi-million dollar programs. The mid-sized companies,
including Jostens Learning, Computer Curriculum, Byron-Price Multimedia and
others, are national companies that generally concentrate on specific segments
of the multimedia market, such as interactive training, entertainment or
education. The smaller companies, such as NB Engineering, develop specific
products for customers that generally represent too small an opportunity for the
Company's large competitors, but are not in the specific niche addressed by its
mid-sized competitors.

PROPRIETARY RIGHTS

The Company considers the technology embodied in its hard disk and processor
upgrade services as valuable intellectual know-how and trade secrets, which it
seeks to protect with confidentiality and non-disclosure agreements. The Company
claims unregistered common law copyright protection on all source code and
documentation relating to its upgrade services and all software developed in the
course of custom-sponsored projects (except as licensed to the customer for its
specific application), to the extent that they contain copyrightable subject
matter. It is unlikely that the Company has the availability of patent
protection for any of its services or products. While the Company exercises what
it considers to be reasonable precautions through confidentiality and
non-disclosure agreements to protect its intellectual property, there can be no
assurance that it will not be misappropriated, copied without authorization, or
reverse engineered. In instances of unauthorized misappropriation, legal
remedies may prove to be inadequate or uneconomical to protect the Company's
intellectual property and competitive advantages. EMPLOYEES

On March 3, 1998, the Company had 63 employees, of whom 61 were full time;
50 (49 full time) were employed by Laptop Solutions and 13 (12 full time) were
employed by NB Engineering. The Company has no separate corporate employees.
Employees are not represented by a labor union. Management believes that
employee relations are excellent.

ITEM 2. DESCRIPTION OF PROPERTY

The Company leases facilities at the following locations:

APPROXIMATE LEASE
LOCATION SQUARE FEET PRINCIPAL FACILITY USE EXPLORATION DATE
- --------------------------------------------------------------------------------
Houston, Tx. 14,478 Office/Services August, 2000
Crofton, MD 5,000 Office/Services November, 1997
Irvine, CA 13,000 Office/Services March, 2000
North Bergen NJ 3,500 Office/Services October, 1998

Management believes that its facilities are suitable for the purposes for which
they are used.

ITEM 3. LEGAL PROCEEDINGS

There are no material legal proceedings pending against the Company.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's 1996 annual meeting of shareholders was held on May 20,
1997. There were no matters to be voted upon by the security holders.

PART II

ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCK MATTERS

MARKET FOR COMMON STOCK

The Company's common stock began trading on the NASDAQ Stock Market
on June 3, 1997 under the symbol ESVS. From December 1, 1991 to June 16, 1993
there were no reported trades of the Company's common stock. Set forth below are
the high and low bid and ask prices of the Company's common stock, adjusted for
the periods prior to May 20, 1996 to reflect a 1-for-5 reverse stock split
effected as of that date, as reported on the OTC Bulletin Board through June 2,
1997, and as traded on the NASDAQ Small Cap market thereafter.

BID ASK
------------------ -------------------
1996 HIGH LOW HIGH LOW
---- ---- --- ---- ---

Dec. 1 6-7/8 1-7/8 8-3/4 3-1/8
through
Feb. 28

March 1 5 1-1/4 6-9/16 2-1/2
through
May 30

June 1 6-1/4 3-3/4 6-1/2 4-1/2
through
August 30

Sept. 1 7-1/4 5-1/2 7-1/2 6-1/4
through
Nov. 30

Dec. 2 5-1/2 2-1/2 6 3-11/16
Through
Feb. 28, 1997

1997

Mar. 3 4-1/4 3 4-3/4 3-7/8
Through
May 30

June 2 3-3/4 1-3/4 4-1/4 2-3/8
Through
Aug, 29

Sept. 1 3-3/4 2-3/8 4-1/8 2-7/8
Through
Nov. 28

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The prices presented are bid and ask prices which represent prices between
broker-dealers and do not include retail mark-ups and markdowns or any
commissions to the broker-dealer. The prices do not reflect prices in actual
transactions.

HOLDERS

As of January 30, 1997, there were 227 holders of record of the Company's
common stock. The Company believes that with the inclusion of holders of stock
held in street name, the estimated total shareholders is 320.

DIVIDENDS

The Company has not paid any dividends on its common stock and does not
expect to do so in the foreseeable future.

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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

OVERVIEW

A. OPERATIONS OF LAPTOP SOLUTIONS-TEXAS

Laptop Solutions-Texas' results of operations for twelve months ended November
30, 1997 and 1996 are summarized below:

1997 1996 CHANGE (%)
----------- ---------- ----------

Sales ......................... $ 3,339,599 $3,576,722 (7)%

Cost of sales
exclusive of depreciation
and salaries) ................. 1,696,279 1,419,446 20 %
----------- ----------

Gross Profit .................. 1,643,320 2,157,276
(24)%

Operating &
Other Expenses .......... 2,469,214 2,155,458 15 %

Net Income,
before income taxes ........... $ (825,894) $ 1,818 --
=========== ==========

SALES: Revenues for enhancement and upgrade increased from $1,470,127 in 1996 to
$1,565,284 in 1997, an increase of $95,157. Sale of units continue to increase
while the per unit revenue and gross margin declined as a result of competitive
pressure. Revenue from Compatibility Plus(TM) sales, the removable hard disk pak
that began shipping in the fourth quarter of 1996, increased to $318,324 in 1997
from $87,071 1996, an increase of $231,253. Revenues from non-warranty repair
and contract maintenance services amounted to $751,661 in 1997 as compared to
$1,353,306 in 1996, a decrease of $601,645. Management believes that the decline
of non-warranty revenue was primarily the result of manufacturers extending the
warranty period from one year to three years and users being more inclined to
replace a three year old unit that is technologically obsolete than to purchase
upgrade and enhancement components. Warranty repair revenue for 1997 amounted to
$544,274, an increase of $81,390, from $462,884 in 1996. Revenues from asset
management services amounted to $119,600,

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a decrease of $30,063 from $149,663 in 1996. All other services decreased
$13,215 from $53,671 in 1996 to $40,456 in 1997.

COST OF SALES: Cost of sales of enhancements and upgrade services increased
$399,140 to $791,703 from $392,563 in 1996, primarily as a result of competitive
pressure. Cost of sales of Computability Plus(TM) increased $140,472 to $186,055
in 1997, from $45,583 in 1996. The increase was the result of increased sales.
Cost of sales of Non-warranty and contract maintenance services decreased
$220,507 to $497,986 in 1997 from $718,493 in 1996. Cost of Compatibility
Plus(TM) amounted to $186,055 in 1997, as compared to $45,583 in 1996, an
increase of $140,472. All other direct cost of sales, primarily freight expense,
decreased $42,272 to $220,535 in 1997 from $262,807 in 1996.

OPERATING AND OTHER EXPENSES: Salaries in 1997 amounted to $1,217,177 as
compared to $1,148,181 in 1996, an increase of $68,996. Personnel and related
cost increases were primarily due to salary and cost of living increases. Rental
increased $5,294 from $168,739 in 1996 to $174,033 in 1997. The increase was
primarily the result of a new lease for the office and warehouse space. (see d.
below for more complete detail) Advertising increased $69,568 in 1997 to
$233,322 from $163,754 in 1996. The increase was a result of management's
decision to place additional advertising commitments in the third and fourth
quarter of 1997. Computer expenses increased $25,611 to $93,884 in 1997 from
$68,273 in 1996 in a continuing program to enhance the capacity and capabilities
of the Company's information system. General insurance increased of $5,114 in
1997 to $34,216 from $29,102 in 1996. The increase is primarily the result of
increased coverage. Health insurance increased $50,479 in 1997 to $88,236 from
$37,757 in 1996 primarily as a result of increases by the insurance carrier.
Miscellaneous Expense increased $38,236 in 1997 from $(605) in 1996 as a result
of settling an EEOC complaint by two former employees. Professional Fees
Decreased $42,042 in 1997 to $50,874 from $92,916 in 1996 primarily as a result
of lower legal fees. Recruiting expense increased $12,480 in 1997 to $23,357
from $10,877 in 1966 as a result of higher employment and difficulty in
recruiting employees. Laptop Solutions-Texas was charged a market rate for its
office and warehouse space by the Company in the amounts of $104,000 for fiscal
1996 and $60,662 during seven months in 1997 and such amounts are included in
Operating and Other Expenses. Other operating expenses, included, professional
and consulting fees, travel, telephone and other general and administrative
expenses, increased from $501,394 in 1996 to $515,879 in 1997, a increase of
$14,485, primarily as a result of increased general overhead expenses.

Management believes that for Laptop Solutions-Texas to achieve profits similar
to prior periods will require greater volume than was required in the past, and
there can be no assurance that Laptop Solutions-Texas will be able to achieve
such volume.

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B. OPERATIONS OF LAPTOP SOLUTIONS-CALIFORNIA

Laptop Solutions-California's results of operations for twelve months ended
November 30, 1997 and 1996 are summarized below

1997 1996 (%)
--------- --------- ------

Sales ............................ $ 1,109,910 $ 431,788 157 %

Cost of sales
(exclusive of depreciation
and salaries) .................... 665,847 219,823 203 %
--------- --------
Gross Profit ................... 444,063 211,965 109 %

Operating &
Other Expenses ................. 771,989 440,275 75 %

Net Income before
income taxes ................... $ (327,926) $(228,310) (44) %
=========== =========

The Company in 1996 formed it's Solutions Engineering Division, and it's
management, technical and administrative personnel are included in Laptop
Solutions-California's operating expenses.

SALES: Repair and enhancement sales for 1997 amounted to $233,303, an increase
of $61,393, from $171,910 in 1996. The increase was primarily the result of an
enhancement project that was completed in the third quarter of 1997. Warranty
repair services increased $28,120 in 1997 to $32,395 from $4,275 in 1996. Laptop
Solutions- California began production of CV/AR200(TM), it's anti-reflective and
increased contrast and luminance LCD Film in 1997. Revenue for 1997 was
$809,381. Revenue from solution services deceased from $256,380 in 1996 to
$34,345 in 1997. The decrease was primarily the result of a special project that
was completed in 1996.

COST OF SALES: Cost of sales for repair and enhancement decreased $17,426 to
$180,930 in 1997 from $198,356 in 1996. Cost of sales of CV/AR2000 amounted to
$415,140 in 1997. All other direct cost increased $48,117 in 1997 from $21,660
in 1996 primarily as a result of expanded facility overhead.

OPERATING AND OTHER EXPENSES: Salaries and related cost increased $113,466 to
$366,758 in 1997 from $253,292 in 1996. The increase is primarily increased
production and administrative cost related to CV/AR2000. Contract services
professional fees and development cost increased $155,607 in 1997 to $182,324
from $26,717 in 1996. The increase was the result of contract production cost of
the CV/AR2000 application process. The Company moved to larger facilities in the
second quarter of 1997 to accommodate the application process and as a result,
rent increased $65,655 in 1997 to $100,815 from $35,160 in 1996. All other
operating expenses amounted to $122,092 in 1997, a decrease of $29,896 from
$151,988 in 1996.

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C. ACQUISITION AND OPERATIONS OF NB ENGINEERING, INC.

NB Engineering's results of operations for twelve months ended November
30, 1997 and 1996 are summarized below.

1997 1996 (%)
----------- ----------- -----
Sales .............................. $ 1,240,761 $ 1,129,128 10 %

Cost of sales
(exclusive of depreciation
and salaries) ...................... 167,096 234,967 (29)%
----------- -----------

Gross Profit ....................... 1,073,665 894,161 20 %

Operating &
Other Expenses ..................... 1,933,890 1,688,544 15 %
----------- -----------
Net Income Before
Income taxes ....................... $ (860,225) $ (794,383) (8) %
=========== ===========

SALES: Compression and DVD sales in 1997 amounted to $1,129,128, an increase of
$251,408 from $913,342 in 1996. NB Digital Solutions phased out of the hardware
integration business in the second quarter of 1997.

OPERATING AND OTHER EXPENSES: Operating and other expenses, net of depreciation
and amortization, increased $7,659 in 1997 to $1,358,504 from $1,350,845 in
1996. A non-recurring credit for property taxes was recorded in 1997 with a
positive effect of $33,366. Depreciation and amortization declined $65,666 in
1997 to $294,027 from $359,693 in 1996. The Company elected to write off
obsolete equipment in 1997 in the net amount of $323,839.

D. ENHANCED SERVICES COMPANY, INC., ACQUISITION OF OFFICE BUILDING IN
HOUSTON, TEXAS

The Company, on May 31, 1995, acquired an office building in Houston, Texas
and sold the building on August 6, 1997 as reported on Form 8-K filed on August
21, 1997. Results of operations related to the office building for the eight
months in 1997 and the year 1996 are summarized and discussed below.

-13-
<PAGE>
Rental income includes an allocated rent charge to Laptop Solutions-Texas in the
amount $69,328 for eight months 1997 as compared to $103,992 for the year 1996.

1997 1996 (%)
--------- --------- --------
Rental Income .................... $ 196,058 $ 219,018 (10) %

Cost of Building
Operations ....................... 209,907 268,400 (22) %
--------- ---------
Net Income,
before income taxes .............. $ (13,919) $ (49,382) (72) %
========= =========

The Company sold the building for $1,750,000 and as a result realized a gain of
$881,311. Laptop Solutions-Texas executed a three-year lease with the building's
purchaser at the prevailing market rate for the space it is occupying.

LIQUIDITY AND CAPITAL RESOURCES

At November 30, 1997, the Company had stockholders' equity totaling
$1,496,050 as compared to $1,722,857 at November 30, 1996, a decrease of
$226,807. This decrease resulted from a net loss of $996,665, the issuance of
2,315 shares of stock valued at $5,356, the exercise of 20,000(post-split)
warrants for a cash consideration of $60,000, the issuance of 8,000 Cumulative
Convertible Preferred Stock with net proceeds of 767,538. The Company's working
capital was $337,799 at November 30, 1997 as compared to $189,310 at November
30, 1996, a increase of $148,489. This increase was primarily the result of the
net loss for the period and the proceeds from; (1) the sale of the Cumulative
Convertible Preferred Stock, (2) the sale of the office building.

The Company executed a working capital loan agreement in the amount of
$500,000 on January 19, 1996 (amended as of June 1, 1996). The loan is due May
31, 1998 with interest paid monthly at 2% above the prime rate and is secured by
accounts receivable and inventory. The Company borrowed $500,000 as of November
30, 1996. Subsequently, on March 3, 1998, agreement was reached to convert this
obligation to preferred stock subject to the approval of all the participants in
the note.

Effective December 31, 1996, the Company completed the minimum portion of a
private offering of its 8.6% Cumulative Convertible Preferred Stock to
investors. The closing resulted in gross proceeds to the Company of $800,000,
and net proceeds of approximately $765,000.

Effective March 3, 1998, the Company entered into and closed a securities
acquisition agreement

-14-
<PAGE>
pursuant to which the Company is issuing 220,000 restricted common shares, or
approximately 19% of its common shares, and 1,000,000 shares of a new class of
nonvoting preferred shares, $3.00 par value per share, in exchange for stock
held by exchanging parties in an internet based, interactive advertising and
marketing corporation. The preferred shares of the Company are convertible into
common shares at the Company's option only after shareholder approval at a
meeting called for that purpose and have a liquidation preference which is
junior to the previously issued preferred shares of the Company. In connection
with the transaction, the holder of Company's $500,000 accounts receivable
collateralized loan has agreed, subject to consent of the loan participants, to
convert the loan into equity.

The following table sets forth computations by management on the Company's
net tangible assets as of March3, 1998, after giving effect to the transaction.

(UNAUDITED)

SHAREHOLDERS EQUITY AT NOVEMBER 30, 1997 ....................... $ 1,496,050

Less: Goodwill at November 30, 1997 ........................... (710,304)

Less: estimated operation losses from December 1, 1997 ........ (150,000)
to February 28, 1998 (estimated)

Plus: value of 220,000 Company Common Shares .................. 1,045,000
Issued in transaction (calculated at NASDAQ closing price
of $4.75 on March 3, 1998)

Plus: conversion of Working Capital Loan ...................... *500,000

Plus $3.00 stated value of 1,000,000 newly issued ............. 3,000,000
-----------
Preferred shares

STOCKHOLDERS EQUITY AT MARCH 3,1998 ............................ * $ 5,180,746
===========

* Consent of loan participants is pending.

Management believes that income generated from operations, along with
additional equity capital pursuant to placements which describe the enterprise
after the stock exchange described in the preceding paragraph, will be
sufficient to finance the Company's historical and newly acquired operations.

The NASDAQ Stock Market, Inc. notified the Company on February 26, 1998 that
the Company was not in compliance with the new requirements for maintaining a
listing on the NASDAQ Small Cap Market. Based on the foregoing computations,
management of the Company believes it meets or exceeds all of the net tangible
assets for continued listing on the NASDAQ Small Cap Market.

-15-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

ENHANCED SERVICES COMPANY, INC.
AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

and

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

November 30, 1997 and 1996

F-1
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES

November 30, 1997 and 1996

Table of Contents

PAGE

Report of Independent Certified Public Accountants ....................... F-3

Consolidated Financial Statements:

Consolidated Balance Sheet ......................................... F-4

Consolidated Statements of Operations .............................. F-5

Consolidated Statement of Changes in Stockholders'
Equity ............................................................ F-6

Consolidated Statements of Cash Flows .............................. F-7

Notes to Consolidated Financial Statements ......................... F-8

F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Enhanced Services Company, Inc.

We have audited the consolidated balance sheet of Enhanced Services Company,
Inc. and Consolidated Subsidiaries as of November 30, 1997 and related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the two years ended November 30, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enhanced Services
Company, Inc. and Consolidated Subsidiaries as of November 30, 1997 and the
results of its operations, its changes in stockholders' equity and its cash
flows for the two years ended November 30, 1997 and 1996 in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1, the Company
has suffered recurring losses from operations which raises substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

Schumacher & Associates, Inc.
Certified Public Accountants
12835 E. Arapahoe Road
Tower II, Suite 110
Englewood, CO 80112
March 3, 1998

F-3
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
November 30, 1997

Current Assets
Cash in bank ............................................ $ 262,510
Inventory ............................................... 499,814
Accounts receivable, net of allowance for
doubtful accounts of $90,920 (Note 7) ................. 624,671
Other current assets .................................... 145,173
-----------
Total Current Assets .................................. 1,532,168

Property and equipment, net of accumulated
depreciation of $470,748 (Notes 2 and 10) ................... 355,868
Goodwill net of accumulated amortization
of $394,623 (Note 3) ........................................ 710,304
Other assets .................................................. 92,079
-----------
Total Assets .................................................. $ 2,690,419
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable and accrued expenses ................... $ 669,326
Notes payable (Note 7) .................................. 517,261
Other current liabilities ............................... 7,782
-----------
Total Current Liabilities ............................. 1,194,369

Total Liabilities ....................................... 1,194,369

Commitments (Notes 3,4,5,6,7,9 and 11) ........................ --

Stockholders' Equity:
Preferred stock - $.001 par value
5,000,000 shares authorized, 8,000
issued and outstanding, 8.6%
cumulative preferred (Liquidation
preference of $800,000) ............................... 8
Common stock - $.001 par value,
15,000,000 shares authorized;
1,125,489 shares issued and
outstanding ........................................... 1,126
Additional paid-in capital .............................. 3,229,957
Accumulated (deficit) ................................... (1,735,041)
-----------
Total Stockholders' Equity .............................. 1,496,050
-----------
Total Liabilities and Stockholders' Equity .................... $ 2,690,419
===========

The accompanying notes are an integral part of the financial statements.

F-4
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended November 30

1997 1996
----------- -----------
Revenue:
Sales .................................... $ 5,689,074 $ 5,051,296
Cost of sales (exclusive
of depreciation and salaries
shown separately below) ................ 2,529,222 1,758,255
----------- -----------
Gross Profit .......................... 3,159,852 3,293,041
----------- -----------
Operating Expenses
Salaries ................................. 2,227,284 2,071,278
Bad debts ................................ 60,813 35,170
Advertising .............................. 265,788 189,090
Rent ..................................... 372,507 181,714
Amortization of goodwill ................. 157,848 157,848
Depreciation ............................. 200,999 274,600
Other operating expenses ................. 1,500,593 1,406,074
----------- -----------
Total Operating Expenses ............... 4,785,832 4,315,774
----------- -----------
Net Operating (Loss) ......................... (1,625,980) (1,022,733)
----------- -----------
Other Income (Expenses)
Investment (loss) income ................. (1,510) 695
Interest expense ......................... (80,049) (48,026)
Gain from disposition of property
and equipment (Note 10) ................. 710,874 --
----------- -----------
Total Other ............................ 629,315 (47,331)
----------- -----------
Net (Loss) ................................... (996,665) (1,070,064)

Provision for Preferred Dividends ............ (63,067) --
----------- -----------
Net (Loss) to Common Shareholders ............ $(1,059,732) $(1,070,064)
=========== ===========
Net (Loss) per Common Share .................. $ (.95) $ (1.01)
=========== ===========
Weighted Average Shares Outstanding .......... 1,114,332 1,058,480
=========== ===========

The accompanying notes are an integral part of the financial statements.

F-5
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY From November 30,
1995 through November 30, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- --------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1995 ..... -- $ -- 5,068,928 $ 5,069 $ 2,124,884 $ 394,755 $ 2,524,708
Common stock issued .............. -- -- 1,940 2 1,211 -- 1,213
Reverse stock split .............. -- -- (4,056,694) (4,057) 4,057 -- --
Common stock issued,
exercise of warrants ............. -- -- 89,000 89 266,911 -- 267,000
Net (loss) for the year
ended November 30, 1996 .......... -- -- -- -- -- (1,070,064) (1,070,064)
----------- --------- ----------- --------- ----------- ----------- -----------
Balance at November 30, 1996 ..... -- -- 1,103,174 1,103 2,397,063 (675,309) 1,722,857
Preferred stock issued, net
of offering costs of $32,454 ..... 8,000 8 -- -- 767,538 -- 767,546
Common stock issued,
exercise of warrants ............. -- -- 22,315 23 65,356 -- 65,379
Preferred stock dividends ........ -- -- -- -- -- (63,067) (63,067)
Net (loss) for the year
ended November 30, 1997 .......... -- -- -- -- -- (996,665) (996,665)
----------- --------- ----------- --------- ----------- ----------- -----------
Balance at November 30, 1997 ..... 8,000 8 1,125,489 $ 1,126 $ 3,229,957 $(1,735,041) $ 1,496,050
=========== ========= =========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.

F-7
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended November 30

1997 1996
--------- -----------
Cash Flows from Operating Activities:
Net (loss) ................................. $(996,665) $(1,070,064)
Adjustments to reconcile net
income to net cash used
in operating activities
Depreciation and amortization .......... 358,847 432,448
(Decrease) in accounts payable
and accrued expenses .................. (191,953) (227,165)
(Increase) decrease in accounts
receivable ............................ 367,708 (306,555)
Decrease in inventory .................. 52,789 70,562
Decrease in income tax refund
receivable ............................ -- 128,800
Other, net ............................. (145,108) 49,412
--------- -----------
Net Cash (Used in) Operating
Activities ................................ (554,382) (922,562)
--------- -----------
Cash Flows from Investing Activities:
(Purchases) of property and
equipment ................................. -- (63,707)
Disposition of property and
equipment ................................. 684,408 --
--------- -----------
Net Cash Provided by (Used
in) Investing Activities .................. 684,408 (63,707)
--------- -----------
Cash Flows from Financing Activities:
Proceeds from notes payable ................ -- 665,000
Principal payments on notes
and mortgages payable ..................... (793,806) (21,750)
Common stock issued ........................ 65,379 144,313
Preferred stock issued ..................... 767,546 --
Preferred stock dividends .................. (63,067) --
--------- -----------
Net Cash Provided by (Used in)
Financing Activities ...................... (23,948) 787,563
--------- -----------
Increase (decrease) in Cash .................... 106,078 (198,706)
Cash, Beginning of Period ...................... 156,432 355,138
--------- -----------
Cash, End of Year .............................. $ 262,510 $ 156,432
========= ===========
Interest Paid .................................. $ 80,049 $ 48,026
========= ===========
Income Taxes Paid .............................. $ -- $ --
========= ===========

Note: In addition, during the year ended November 30, 1996, the Company issued
855,596 (post-split 171,119) shares of its restricted common stock for the
acquisition described in Note 1, and it assumed liabilities totalling
approximately $1,212,000 as part of the acquisition of NB Engineering, Inc.

The accompanying notes are an integral part of the financial statements.

F-8
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
November 30, 1997 and 1996

(1) GENERAL

(A) NATURE OF OPERATIONS

Enhanced Services Company, Inc. (ESC) a Colorado Corporation, was
incorporated in 1987.

Laptop Solutions, Inc. (LSI), a wholly-owned subsidiary of ESC
incorporated in Texas, installs internal hard drive, processor and RAM
upgrades for, and repairs and customizes, laptop and notebook computers.

Laptop Solutions, Inc. (LCA), a wholly-owned subsidiary of ESC
incorporated in California, provides laptop/notebook repair and
maintenance services, including FPD (flat panel display) subsystems and
motherboards.

Effective May 31, 1995, NB Engineering, Inc. (NBE), a wholly-owned
subsidiary of ESC incorporated in Delaware, acquired substantially all of
the assets and ESC assumed certain liabilities of NB Engineering, Inc.,
(NB) a privately held Maryland corporation. NBE provides applications
development and digital video compression services and sells related
video and networking products. (See Note 3).

The consolidated financial statements include the accounts of ESC, LSI,
LCA and NBE since May 31, 1995, the date of the acquisition of NB. All
intercompany accounts and transactions have been eliminated. All
references to the Company, refer to consolidated operations of ESC, LSI,
LCA and NB.

(B) SIGNIFICANT ACCOUNTING POLICIES

(a) REVENUE RECOGNITION

The Company recognizes sales revenue when the service is complete and the
customer's equipment is returned. The Company recognizes revenue from
contract services based on the percent of completion method. The Company
has no long-term production or service contracts.

(b) ACCOUNTS RECEIVABLE

Accounts receivable represents amounts due from customers for services
performed and equipment sold. An allowance for uncollectible accounts has
been provided based upon past collection experience.

F-9
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1997 and 1996

(B) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Property and equipment are carried at cost less accumulated
depreciation. The Company expenses maintenance costs and
capitalizes significant betterments. Depreciation is provided over
the estimated useful lives of the assets ranging from three to
thirty-nine years using principally accelerated methods.

(d) PER SHARE INFORMATION

The per share information is presented based upon the weighted
average number of shares outstanding. The shares outstanding for
purposes of computing per share information have been retroactively
adjusted for the one-for-five reverse stock split.

(e) INVENTORY

The Company's inventory consists principally of computer related
parts and is carried at the lower of cost or market. Cost is
determined based on the average cost method. No general or
administrative costs are allocated to inventory.

(f) PREFERRED STOCK

The Articles of Incorporation of the Company authorize issuance of
a maximum of 5,000,000 preferred shares and vests the Board of
Directors with authority to divide the class of preferred shares
into series and fix and determine the relative rights and
preferences of the shares of any such series at a future date (see
Note 9).
(g) CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts
receivable. The Company grants credit to various business and
entities, principally in the U.S.A. The Company does not require
collateral for its accounts receivable.

(h) CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash accounts in banks and
short-term securities held with a brokerage company.

F-10
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1997 and 1996

(B) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(i) USE OF ESTIMATES AND ASSUMPTIONS IN THE PREPARATION OF FINANCIAL
STATEMENTS

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. The
Company, as described in Note 3, is amortizing its goodwill related
to the NB acquisition over a seven year period. The assumption that
the Company will recover these goodwill costs over a seven year
period is inherent in the preparation of the financial statements.
The extent to which this goodwill is recovered in the seven years,
or is recovered at all, is a significant contingency, the ultimate
results of which cannot presently be determined.

(j) ADVERTISING COSTS

Advertising costs are expensed as incurred.

The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company has
suffered recurring losses from operations which raise substantial doubt
about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

In view of this matter, realization of certain of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financial requirements, raise additional capital, and the success of its
future operations. The Company recently completed a business combination
as described in Note 11. Management believes that its ability to raise
additional capital in conjunction with this business combination provides
the opportunity for the Company to continue as a going concern.

F-11
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
November 30, 1997 and 1996

(2) PROPERTY AND EQUIPMENT

As of November 30, 1997 the Company's property and equipment consisted
principally of office furniture and computer equipment with a total cost
of $826,616. Accumulated depreciation as of November 30, 1997 totalled
$470,748.

Depreciation is provided over the estimated useful lives of the assets
ranging from three to seven years on furniture and equipment using
principally accelerated methods.

(3) GOODWILL

As described in Note 1, the Company acquired NBE, resulting in goodwill of
approximately $1,105,000. Goodwill is being amortized on a straight-line
basis over a seven year period. The Company believes that a 7 year
estimated life over which goodwill is being amortized is reasonable.

It is the Company's policy that management on a periodic basis, at least
quarterly, will evaluate the carrying value of goodwill and other
intangibles to determine if there is an impairment of value or the
remaining estimated life is less that the remaining unamortized period. If
the evaluation indicates write-downs or adjustments to the amortization
are necessary, such write-downs or adjustments will be made immediately.

(4) OPTIONS AND WARRANTS OUTSTANDING

As of November 30, 1997 the Company had outstanding 232,973 warrants and
options issued to various employees, consultants and directors. The
exercise prices for these options and warrants range between $1.875 and
$4.55 per share, and expire in various years through 2002. Subsequent to
November 30, 1997 the Company granted an additional 51,000 options at
$1.875 per share that expire in 2003. The options have not been taken into
consideration when determining per share information, since exercise of
these options would be anti-dilutive. During the years ended November 30,
1997 and 1996, 22,315 and 89,000 options or warrants were exercised,
respectively, with proceeds to the Company of $65,379 and $267,900,
respectively.

F-12
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1997 and 1996

(5) OPERATING LEASES

The Company leases or rents various equipment and office facilities.
Future commitments under these operating leases, with leases terms
exceeding twelve months total approximately:

Year ending November 30:
1998 $253,884
1999 253,884
2000 135,300

(6) CONSULTING AGREEMENT

On April 8, 1996, the Company entered into an agreement with Creative
Business Strategies, Inc. (CBS). Pursuant to the agreement, CBS provided
consulting services to the Company for a term of one year. As
consideration for services rendered by CBS, the Company issued to CBS
common stock purchase warrants exercisable to purchase, in the aggregate
109,000, 42,000 shares at $.05 per share, and 67,000 shares at $3.00 per
share. During the year ended November 30, 1996 the 42,000 warrants were
exercised at $.05 per share and 47,000 warrants were exercised at $3.00
per share. The remaining 20,000 warrants were exercised during December
1996. The difference between the exercise price of the warrants and the
market value of the shares amounting to $123,900 was amortized and
expensed over the twelve month term of the agreement.

On August 20, 1997 the Company entered into an agreement with CBS.
Pursuant to the agreement CBS has agreed to provide consulting services to
the Company for a term of one year. As consideration for the services
rendered by CBS, the Company issued to CBS common stock purchase warrants
exercisable to purchase, in the aggregate 65,000 shares, 12,500 at $2.00
per share, 12,500 at $2.50 per share, 12,500 at $3.00 per share, 12,500 at
$4.00 per share, and 15,000 at the average price as so reported for the
three months ended August 20, 1998. As of November 30, 1997 all 65,000
warrants were unexercised.

F-13
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1997 and 1996

(6) CONSULTING AGREEMENT, CONTINUED

On August 20, 1997, the Company entered into an agreement with Wall Street
Financial (WSF). Pursuant to the agreement, WSF has agreed to provide
consulting services to the Company for a term of one year. As
consideration for all services to be rendered by WSF, the Company issued
to WSF common stock purchase warrants exercisable to purchase, in the
aggregate 50,000 shares, 12,500 at $3.00 per share, 12,500 at $3.25 per
share, 12,500 at $3.75 per share and 12,500 at $4.00 per share. As of
November 30, 1997 all 50,000 were unexercised.

(7) NOTES PAYABLE

As of November 30, 1997 the Company had various notes payable consisting
principally of a $500,000 note payable to an entity bearing interest at 2%
over prime, collateralized by the Company's accounts receivable with an
extended due date of June 1, 1998.

(8) INCOME TAXES

The Company has net operating loss carryovers of approximately $1,735,000
expiring in the year 2012. As of November 30, 1997 the Company has total
deferred tax assets of approximately $347,000 due to the operating loss
carryovers. However, because of the uncertainty of potential realization
of these tax assets, the Company has provided a valuation allowance for
the entire $347,000 therefore, no tax assets have been recorded in the
financial statements as of November 30, 1997.

F-14
<PAGE>
ENHANCED SERVICES COMPANY, INC. AND CONSOLIDATED SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS, CONTINUED
November 30, 1997 and 1996

(9) PREFERRED STOCK

As of November 30, 1997 8,000 shares of preferred stock have been issued
(see Note 1). The 8,000 preferred shares were issued effective December
31, 1996 with gross proceeds to the Company of $800,000. The Company
incurred offering costs of approximately $32,454 which were netted against
the proceeds of the offering. The preferred stock has preference in
liquidation to the extent of the $800,000 and cumulative dividends at 8.6%
per annum. During the year ended November 30, 1997 the Company incurred
preferred stock dividends of $63,067 of which $51,600 were paid and
$11,467 accrued. Each share of preferred stock will automatically convert
to 22 shares of $.001 common stock on the second anniversary of December
31, 1996, the date of issuance.

(10) GAIN ON SALE OF PROPERTY AND EQUIPMENT

During the year ended November 30, 1997 the Company sold its investment in
its office building resulting in a gain of approximately $881,311. In
addition, the Company disposed of certain equipment resulting in a loss of
$170,437. The net gain on sale of property and equipment totalled
$710,874.

The Company in July, 1997 entered into a three year leaseback agreement
for 14,478 square feet of rentable area in the office building it sold,
with a minimum of $12,658 rent per month. The Company deposited $152,019
with the lease. This amount is equal to one half of the first two years
rent and is being amortized and credited against one half the monthly rent
during this period.

(11) SUBSEQUENT EVENT

Effective March 3, 1998, the Company entered into a securities acquisition
agreement pursuant to which the Company is issuing 220,000 common shares
or approximately 19% of its common shares and 1,000,000 shares of a new
class of nonvoting preferred shares, $3.00 par value per share, in
exchange for stock held by exchanging parties in an interactive
advertising and marketing corporation. The preferred shares of the Company
are convertible into common shares at the Company's option only after
shareholder approval at a meeting called for that purpose and have a
liquidation preference which is junior to the previously issued preferred
shares of the Company. In connection with the transaction, the holder of
the Company's $500,000 accounts receivable collateralized loan agreed,
subject to consent to the loan participants, to convert the loan into
equity.

F-15
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

During the Company's two most recent fiscal years, it has not changed
accountants nor had disagreements with its accountants on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures.

PART III

ITEM 9. DIRECTORS AND OFFICERS.

The directors, executive officers and key employees of the Company are as
follows:

NAME AGE POSITION
----------------------- --------- ---------------------------------------------
Kenneth M. Duckman 45 President, Chief Executive Officer and
director of the Company and Laptop
Solutions, Inc., and director of NB
Engineering, Inc.

Bertram Pariser, Ph.D. 57 Secretary and Director of the Company,
Laptop Solutions, Inc., and NB Engineering,
Inc. (1)(2)

John Meaney 48 Director of the Company and Laptop
Solutions, Inc.(1)(2)

Michael Bernard 45 Director of the Company and Laptop
Solutions, Inc.(1)(2)

Ralph LaBarge 42 President, NB Engineering, Inc. and director
of the Company and NB Engineering, Inc.

Bill S Murski 37 Director of the Company and Laptop
Solutions, Inc. (3)

Robert Smith 58 Chief Financial Officer and Treasurer of the
Company and Laptop Solutions, Inc.

(1) Member of the Compensation Committee.
(2) Member of the Stock Option Committee.
(3) Member of the Audit Committee

MR. KENNETH M. DUCKMAN has been President and Chief Executive Officer and
a director of the Company since September 1992. Mr. Duckman has been Chairman of
the Board, President and Chief Executive Officer of Laptop Solutions, Inc. since
its inception in February, 1991, and a director of NB Engineering since June
1995. Mr. Duckman was the founder of LTC Technologies, Inc., d/b/a Source One
Systems (field automation technology specialists) and served as its President

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<PAGE>
from December 1984 to February 1991. In February 1990, LTC was acquired by a
diversified technologies firm, and from February 1990 to January 1991 Mr.
Duckman served as a member of its Board of Directors and as vice-president of
Corporate Development.

DR. BERTRAM PARISER has been a director of the Company and Laptop
Solutions, Inc. since May 1993 and Secretary of the Company and LSI since
December 1993. In June 1995 he became a director and secretary of NB
Engineering, Inc. Since 1966, he has been the President of M.I.T.C.U.
Corporation, which provides consultation to investment banking firms and private
clients. Since 1991, Dr. Pariser has also been a member of the faculty at
Technical Career Institutes, in the department of electronic engineering
technology, lecturing in physics. Dr. Pariser earned a B.S. degree from M.I.T.
in 1961 and an M.S. and Ph.D. in electrical engineering from Columbia University
in 1963 and 1965, respectively. Dr. Pariser is a cousin of Mr. Duckman.

MR. JOHN MEANEY has been a director of the Company and LSI since December
1993. From 1972 to 1986, Mr. Meany served in a variety of sales and management
positions with IBM. From 1986-1988, he served as Director of Product Marketing
at NYNEX Business Centers in Atlanta, GA. As a Director of the Southern Region
for Toshiba from 1988 to 1992, Mr. Meaney had responsibility for building the
region to the leading producer for Toshiba. From 1992 to 1996, Mr. Meaney served
as Vice-President and General Manager for the Panasonic Personal Computer
Company. From 1996 to 1997,Mr. Meaney served as the Vice-President of Sales for
Olicom, Inc. and, since 1998, is currently Vice-President of Sales, Central
Region, of Tech Data Corporation. Mr. Meaney earned his BA in Economics from the
University of Notre Dame in 1968 and his MBA in Marketing and Finance from Long
Island University and Fairleigh Dickenson University in 1982.

MR. MICHAEL BERNARD has been a director of the Company and LSI since March
1993. Mr. Bernard is currently the President and CEO of a start-up software
company, MindMap Software Corporation. Prior to this, he was a consultant in the
field of international marketing and distribution for high technology
communications and computer products. From 1991 through 1992, Mr. Bernard was
Vice-President, International Sales and Marketing, for Portable Products at U.S.
Robotics, Inc. (computer modems). Prior to its acquisition by U.S. Robotics,
Inc., Mr. Bernard was the co-founder of Touchbase Systems, Inc. (modem and
communication products), serving as Director of International Sales and
Marketing from 1985.

MR. RALPH LABARGE has been a director of the Company since June 1995.
Since founding NB Engineering, Inc. in January 1985, Mr. LaBarge has served as
its President and Chief Technical Officer. Mr. LaBarge has a bachelor's degree
in Electrical Engineering from the University of Delaware, a master's degree in
Computer Science from Johns Hopkins University and a master's degree in
Electrical Engineering from Johns Hopkins University. Prior to his employment
with the Company, Mr. LaBarge served as a Principal Engineer for HRB-Singer,
Inc. A State College, PA based defense contractor.

BILL S. MURSKI, III, has been a director of the company since April 1997.
He has been Senior Vice President and Director of Investment Advisory Services
of FCA Corp. (financial advisory services) and Vice President of Nashville
Properties (real estate investment) since 1989. Prior thereto, he was a Senior
Associate with Kors, Malar & Associates (management advisory services). Mr.
Murski earned a B.B.A. in accounting from the University of Texas at Austin in
1983 and an M.B.A. in finance from the University of Houston in 1985.

MR. ROBERT SMITH has been Chief Financial Officer of Laptop Solutions,
Inc. since October 1993.

-17-
<PAGE>
Prior to Laptop Solutions, Inc., Mr. Smith served as President of Horizon
Computer Resources, Inc., a full service consulting and automation advisory
firm, since 1986. Prior to founding Horizon, Mr. Smith served as Chief Financial
Officer of Lynn Elliott Company (1980-1986), a diversified holding company with
19 subsidiaries in the petrochemical industry. From 1960 to 1980, Mr. Smith was
a certified public accountant in public accounting practice. Mr. Smith received
his BS in Accounting from Mississippi State University in 1961 and his CPA
license in 1970.

BOARD MEETINGS AND COMMITTEES

The Board of Directors of the Company held four formal meetings during the
fiscal year ended November 30, 1997. Each Director other than attended in person
(or participated by telephone) in more than 75% of the total number of Board of
Directors' meetings held during the last fiscal year. The Board of Directors has
no standing nominating committee. The Board has a Compensation Committee to
assist it in reviewing the compensation levels of officers and directors of the
Company, including all stock option grants made under the Company's Incentive
Stock Option Plan. Its members are Michael Bernard, John Meaney and Bertram
Pariser.

COMPENSATION OF DIRECTORS

Directors do not receive a salary for their services as directors, although
they are reimbursed for expenses incurred in attending Board meetings. The
Company has granted its directors non-qualified stock options in consideration
of their services to the Company. In the last fiscal year the Company granted
options for a total of 8,000 shares of its Common Stock to four directors.

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth all compensation paid to the Company's
President and Chief Executive Officer during the last three fiscal years. The
Company had no executive officer as of November 30, 1996 that earned in excess
of $100,000 in compensation during the fiscal year then ended.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Fiscal All Other
NAME AND PRINCIPAL YEAR SALARY BONUS OPTIONS COMPENSATION
POSITION

Kenneth M. Duckman 1997 $75,000
President and 1996 $70,000 $-0- -0- *
Chief Executive Officer 1995 $90,000 -0- -0- *
1994 $60,000 6,000 39,000 *
</TABLE>
* Constitutes less than 10% of annual compensation.

-18-
<PAGE>
STOCK OPTIONS

No options were granted to the Company's President and Chief Executive
Officer during the fiscal year ended November 30, 1997.

The following table sets forth information concerning options exercised
during the fiscal year ended November 30, 1997 and the number of unexercised
options held by the Company's above named executive officer at the end of such
fiscal year:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS AT OPTIONS AT
ACQUIRED OF REALIZED FY-END(#) FY-END($)
NAME EXERCISE(#) $ EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---------- ----------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Kenneth M. -0- -0- -0- -0-
Duckman
</TABLE>
- ---------------
(1) Based on the average high/low bid/ask prices of the Company's Common
Stock as reported by the National Quotations Bureau, the fair market
value of its Common Stock as of its fiscal year ended November 30,
1997 was $4.00 per share.

ITEM 11. SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS.

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 12, 1997 by (i) each
shareholder who is known by the Company to own beneficially more than 5% of its
Common Stock, (ii) each director of the Company, and (iii) all directors and
officers of the Company as a group.

<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF
NAME AND ADDRESS(1) OF BENEFICIAL OWNERSHIP CLASS OUTSTANDING
--------------------- --------------------------- -------------------
<S> <C> <C>
Kenneth M. Duckman 624,178(2) 55%

Ralph LaBarge 74,058 (3) *
Bertram Pariser, Ph.D. 6,000 (4) *

Michael Bernard 12,500 (5) 1.1%

John Meaney 6,000 (6) *

Bill S. Murski, III 2,000 (7) *

All Directors and Executive Officers
as a Group (7 Persons) 746,869(*) 68.5%
</TABLE>
-19-
<PAGE>
- -------------------
* Constitutes less than 1%

(1) Unless otherwise indicated, the address of each beneficial owner is
c/o Enhanced Services Company, Inc., 16000 Barkers Point Lane,
Houston, Texas 77079.

(2) Includes 47,667 shares of Common Stock held by a charitable trust for
which Mr. Duckman is co-trustee.

(3) Includes 2,000 shares underlying stock options for which Mr.
LaBarge has the right to acquire.

(4) Includes 6,000 shares underlying stock options for which Dr.
Pariser has the right to acquire.

(5) Includes 6,000 shares underlying stock options for which Mr.
Bernard has the right to acquire.

(6) Includes 6,000 shares underlying stock options for which Mr. Meaney
has the right to acquire.

(7) Includes 2,000 shares underlying stock options for which Mr. Murski
has the right to acquire.

(8) In addition to those shares set forth in Notes (2) through (8) above,
also includes 12,500 shares underlying stock options for which one
executive officer has the right to acquire.

ITEM 12. TRANSACTIONS WITH MANAGEMENT AND OTHERS.

On April 8, 1996 the Company entered into an agreement (the "96Agreement") with
Creative Business Strategies, Inc. ("CBS"), a beneficial holder, on the exercise
of warrants granted pursuant thereto, of 10.4% of the company's outstanding
Common Stock. Pursuant to the Agreement, CBS is to provide consulting services
to the Company for an initial term of one year. As consideration for all
services to be rendered by CBS under the Agreement, the Company issued to CBS
Common Stock purchase warrants exercisable to purchase, in the aggregate 109,000
shares, 42,000 (post-split) at $.05 per share, and 67,000 (post-split) shares at
$3.00 per share. During the year ended November 30, 1996 the 42,000 (post-split)
warrants were exercised at $.05 per share and 47,000 (post-split) warrants were
exercised at $3.00 per share. The remaining 20,000 (post-split) warrants were

-20-
<PAGE>
exercised subsequently during December 1996. The difference between the exercise
price of the warrants issued during the year ended November 30, 1996 and the
market value of the shares amounting to $123,900 is being amortized as an
expensed consulting fee over the twelve month term of the CBS agreement.

On August 20, 1997 the Company entered into an agreement (the "97 CBS
Agreement") with Creative Business Strategies, Inc. ("CBS"), a beneficial
holder, on the exercise of warrants granted pursuant thereto, of 4.4% of the
company's outstanding Common Stock. Pursuant to the Agreement, CBS is to provide
consulting services to the Company for an initial term of one year. As
consideration for all services to be rendered by CBS under the Agreement, the
Company issued to CBS Common Stock purchase warrants exercisable to purchase, in
the aggregate 65,000, 12,500 at $2.00 per share, 112,500 at $2.50 per share,
12,500 at $3.00 per share and 12,500 shares at $4.00 per share, 15,000 at the
average price as so reported for the three months ended August 20, 1998. At the
year ended November 30, 1997, all 65,000 remain unexercised.

On August 20, 1997 the Company entered into an agreement (the "97 WSF
Agreement") with Wall Street Financial ("WSF"), on the exercise of warrants
granted pursuant thereto, of 4.4% of the company's outstanding Common Stock.
Pursuant to the Agreement, WSF is to provide consulting services to the Company
for an initial term of one year. As consideration for all services to be
rendered by WSF under the Agreement, the Company issued to WFS Common Stock
purchase warrants exercisable to purchase, in the aggregate 50,000, 12,500 at
$3.00 per share, 12,500 at $3.25 per share, 12,500 at $3.75 per share and 12,500
shares at $4.00 per share. At the year ended November 30, 1997, all 50,000
remain unexercised.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

EXHIBITS

The following Exhibits are filed as part of this Registration Statement
pursuant to Item 601 of Regulation S-B:

EXHIBIT NO. TITLE

* 3.1 Amended and Restated Articles of Incorporation

** 3.2 Articles of Amendment to Articles of Incorporation

*** 3.2 By-Laws

*** 4.0 Specimen Certificate of Common Stock

**** 4.1 Copy of Company's Amended Stock Incentive Plan

*** 10.1 Copy of signed Stock Transfer Agent Agreement

***** 10.2 Agreement to Exchange Stock, dated as of September 30, 1992

***** 10.3 First Amendment to Agreement to Exchange Stock, dated as of
October 30, 1992

-21-
<PAGE>
* Incorporated by reference from the Company's Form 10-KSB for its
fiscal year ended November 30, 1994, and filed with the Commission on
or about February 28, 1994.

** Incorporated by reference from the Company's report on Form 8-K as
filed with the Commission on February 7, 1997, as amended under cover
of Form 8-K/A, filed with the Commission on, February 11, 1997

*** Incorporated by reference from the Company's report on Form 8-K
as filed with the Commission on August 6, 1997

**** Incorporated by reference from the Company's Registration Statement
on Form S-18, SEC Registration No. 33-20399-D.

***** Incorporated by reference from the Company's Proxy Statement for its
1994 Annual Meeting of Shareholders, filed with the Commission on or
about March 30, 1994.

****** Incorporated by reference from the Company's report on Form 8-K as
filed with the Commission on October 15, 1992, as amended under cover
of Form 8, filed with the Commission on November 13, 1992, and as
further amended under cover of Form 8, filed with the Commission on
December 2, 1992.

CURRENT REPORTS ON FORM 8-K

There were no reports on Form 8-K filed by the Company during the
last quarter of its fiscal year ended November 30, 1997.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this annual
report to be signed on its behalf by the undersigned, thereunto duly authorized.

ENHANCED SERVICES COMPANY, INC. (Registrant)

Date: March 6, 1998 By /s/ KENNETH M. DUCKMAN
Kenneth M. Duckman, President
and Chief Executive Officer

Date: March 6, 1998 By /s/ ROBERT C. SMITH
Robert Smith, Chief Financial Officer

-22-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Date: March 6, 1998 By /s/ KENNETH M. DUCKMAN
Kenneth M. Duckman, Director

Date: March 6, 1998 By /s/ MICHAEL BERNARD
Michael Bernard, Director

Date: March 6, 1998 By /s/ RALPH LABARGE
Ralph LaBarge, Director

Date: March 6, 1998 By /s/ JOHN MEANEY
John Meaney, Director

Date: March 6, 1998 By_______________________________
Dr. Bertram Pariser, Director

Date: March 6, 1998 By /s/ BILL S. MURSKI, III
Bill S. Murski, III

-23-

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> 262,510
<SECURITIES> 0
<RECEIVABLES> 715,591
<ALLOWANCES> 90,920
<INVENTORY> 499,814
<CURRENT-ASSETS> 1,532,168
<PP&E> 826,616
<DEPRECIATION> 470,748
<TOTAL-ASSETS> 2,690,419
<CURRENT-LIABILITIES> 1,194,369
<BONDS> 0
0
8
<COMMON> 1,126
<OTHER-SE> 1,494,916
<TOTAL-LIABILITY-AND-EQUITY> 2,690,419
<SALES> 5,689,074
<TOTAL-REVENUES> 6,399,948
<CGS> 2,529,222
<TOTAL-COSTS> 4,785,832
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 60,813
<INTEREST-EXPENSE> 80,049
<INCOME-PRETAX> (1,625,980)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,625,980)
<DISCONTINUED> 0
<EXTRAORDINARY> 710,874
<CHANGES> 0
<NET-INCOME> (996,665)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> (0.95)

</TABLE>