<PAGE>

                   SECURITIES AND EXCHANGE COMMISSION
                         Washington, D.C. 20549

                                FORM 10-Q

            Quarterly Report Pursuant to Section 13 or 15 (d)
                 of the Securities Exchange Act of 1934

                 For the Quarterly Period Ended June 30, 1997

                         Commission File Number 0-7092

                           RELIABILITY INCORPORATED
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)


             TEXAS                                 75-0868913        
-------------------------------       -----------------------------------
(State or other jurisdiction of        (I.R.S. Employer Identification No.)
 incorporation or organization)



         16400 Park Row
         Post Office Box 218370
         Houston, Texas                                        77218-8370
----------------------------------------                       ----------
(Address of principal executive offices)                        (Zip Code)




                                (281) 492-0550
             ----------------------------------------------------
             (Registrant's telephone number, including area code)

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 twelve 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 ninety days.

                   YES     X          NO 
                      -----------       -----------

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

                    2,976,917 -- Common Stock -- No Par Value
                            as of August 8, 1997












                                    1
<PAGE>

                        RELIABILITY INCORPORATED
                                FORM 10-Q

                            TABLE OF CONTENTS

                              June 30, 1997


                     PART I - FINANCIAL INFORMATION

                                                                 Page No.
                                                            

Item 1.  Financial Statements:

         Consolidated Balance Sheets:
            June 30, 1997 and December 31, 1996                     3-4

         Consolidated Statements of Income
           and Retained Earnings:
            Six Months Ended June 30, 1997 and 1996                   5
            Three Months Ended June 30, 1997 and 1996                 6

         Consolidated Statements of Cash Flows:
            Six Months Ended June 30, 1997 and 1996                   7

         Notes to Consolidated Financial Statements                8-13

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations                    14-18


                       PART II - OTHER INFORMATION

Item 1.
  through
Item 5.  Not applicable.

Item 6.  Exhibits and Reports on Form 8-K.                           19

Signatures                                                           20


The information furnished in this report reflects all adjustments (none of
which were other than normal recurring accruals) which are, in the opinion
of management, necessary to a fair statement of the results of the interim
periods presented.
















                                    2
<PAGE>

                     PART I - FINANCIAL INFORMATION


Item 1.         Financial Statements

                        RELIABILITY INCORPORATED
                       CONSOLIDATED BALANCE SHEETS
                             (In thousands)

                                 ASSETS

                                                 June 30,    December 31,
                                                   1997          1996
                                                (unaudited)

Current assets:
  Cash and cash equivalents                      $ 1,062       $ 8,504
  Accounts receivable (Note 2)                     8,813         4,188
  Inventories (Notes 1 and 2)                      4,949         3,159
  Prepaid income tax                                   -           286
  Deferred tax assets                                753           760
  Other current assets                               320           449
                                                 -------       -------
    Total current assets                          15,897        17,346

Property, plant and equipment, at cost (Note 2):
  Machinery and equipment                         14,862        13,807
  Building and improvements                        7,693         8,706
  Land                                               792           792
                                                 -------       -------
                                                  23,347        23,305
    Less accumulated depreciation                 13,638        14,048
                                                 -------       -------
                                                   9,709         9,257
                                                 -------       -------
                                                 $25,606       $26,603
                                                 =======       =======
























                         See accompanying notes

                                    3
<PAGE>

                        RELIABILITY INCORPORATED
                       CONSOLIDATED BALANCE SHEETS
                    (In thousands, except share data)

                  LIABILITIES AND STOCKHOLDERS' EQUITY

                                                 June 30,    December 31,
                                                   1997          1996
                                               (unaudited) 

Current liabilities:
  Current maturities on long-term debt (Note 2)  $   384       $   367
  Accounts payable                                 1,847           700
  Accrued liabilities                              3,185         3,220
  Income taxes payable                               934           331
                                                 -------       -------
      Total current liabilities                    6,350         4,618

Long-term debt(Note 2)                             4,470         1,961
Deferred tax liabilities                             312           356
Commitments and contingencies (Note 4)                 -             -

Stockholders' equity:
  Common stock, without par value;
    20,000,000 shares authorized,
    4,242,848 shares issued                        5,926         5,926
  Retained earnings                               16,804        13,742
                                                 -------       -------
                                                  22,730        19,668
  Less treasury stock at cost, 
    1,270,221 shares in 1997 (Note 3)             (8,256)            -
                                                 -------       -------
      Total stockholders' equity                  14,474        19,668
                                                 -------       -------
                                                 $25,606       $26,603
                                                 =======       =======

























                         See accompanying notes

                                    4
<PAGE>

                        RELIABILITY INCORPORATED
         CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
                  (In thousands, except per share data)

                        Six Months Ended June 30,

                                                   1997          1996
                                                       (unaudited)

Revenues                                         $19,300       $16,167

Costs and expenses:
  Cost of revenues                                 9,772         7,789
  Marketing, general and administrative            3,990         4,307
  Research and development                           838         1,033
                                                 -------       -------
                                                  14,600        13,129
                                                 -------       -------
Operating income                                   4,700         3,038
Interest expense, net (Note 2)                        93            58
                                                 -------       -------
Income before income taxes                         4,607         2,980
                                                 -------       -------
Provision (benefit) for income taxes (Note 1):
  Current                                          1,582         1,137
  Deferred                                           (37)         (133)
                                                 -------       -------
                                                   1,545         1,004
                                                 -------       -------
Net income                                         3,062         1,976

Retained earnings beginning of period             13,742         8,896
                                                 -------       -------
Retained earnings end of period                  $16,804       $10,872
                                                 =======       =======

Earnings per common share                        $   .87       $   .47
                                                 =======       =======

Weighted average shares outstanding                3,502         4,243
                                                 =======        ======




















                         See accompanying notes

                                    5
<PAGE>

                        RELIABILITY INCORPORATED
         CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
                  (In thousands, except per share data)

                       Three Months Ended June 30,

                                                   1997          1996
                                                       (unaudited)

Revenues                                         $12,609       $ 9,409

Costs and expenses:
  Cost of revenues                                 6,062         4,750
  Marketing, general and administrative            2,579         2,144
  Research and development                           433           521
                                                 -------       -------
                                                   9,074         7,415
                                                 -------       -------
Operating income                                   3,535         1,994
Interest expense net (Note 2)                         96            38
                                                 -------       -------
Income before income taxes                         3,439         1,956
                                                 -------       -------
Provision (benefit) for income taxes (Note 1):
  Current                                          1,128           795
  Deferred                                           (12)         (124)
                                                 -------       -------
                                                   1,116           671
                                                 -------       -------
Net income                                         2,323         1,285

Retained earnings beginning of period             14,481         9,587
                                                 -------       -------
Retained earnings end of period                  $16,804       $10,872
                                                 =======       =======

Earnings per common share                        $   .78       $   .31
                                                 =======       =======

Weighted average shares outstanding                2,973         4,243
                                                 =======       =======




















                         See accompanying notes

                                    6
<PAGE>

                        RELIABILITY INCORPORATED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (In thousands)

                        Six Months Ended June 30, 

                                                   1997          1996
                                                      (unaudited)
Cash flows from operating activities:
  Net income                                     $ 3,062        $1,976
  Adjustments to reconcile net income to cash
    provided (used) by operating activities:
      Depreciation                                   735           673
      Change in deferred tax assets and
        liabilities                                  (37)         (133)
      Provision for inventory obsolescence           353           372
  Increase (decrease) in operating cash flows:
      Accounts receivable                         (4,625)        2,297
      Inventories                                 (2,143)       (2,195)
      Other current assets                           129            64
      Prepaid income tax                             286             -
      Accounts payable                             1,147          (655)
      Accrued liabilities                            (35)         (987)
      Income taxes payable                           603          (334)
                                                  ------        ------
          Total adjustments                       (3,587)         (898)
                                                  ------        ------
Net cash (used) provided by
  operating activities                              (525)        1,078
                                                  ------        ------
Cash flows from investing activities:
  Expenditures for property, plant
    and equipment                                 (1,187)       (1,019)
                                                  ------        ------
Cash flows from financing activities:
  Borrowings under loan agreement                  2,706             -
  Purchase of common stock for treasury           (8,256)            -
  Payments on long-term debt                        (180)          (96)
                                                  ------        ------
Net cash (used) provided by
  financing activities                            (5,730)          (96)
                                                  ------        ------
Net increase (decrease) in cash                   (7,442)          (37)
Cash at beginning of period                        8,504         1,552
                                                  ------        ------
Cash at end of period                            $ 1,062        $1,515
                                                  ======        ======


Supplemental disclosures:
  Interest paid                                  $   147        $  114
                                                  ======        ======
  Income taxes paid                              $   690        $1,469
                                                  ======        ======







                         See accompanying notes

                                    7
<PAGE>

                        RELIABILITY INCORPORATED
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              June 30, 1997

1.  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business
-----------------------

    Reliability Incorporated is a United States based corporation with
operations in the United States, Singapore and Costa Rica.  The Company and
its subsidiaries are principally engaged in the design, manufacture and sale
of equipment used to test and condition integrated circuits.  The Company
and its subsidiaries also operate service facilities which condition and
test integrated circuits as a service to others and manufacture and sell
power sources, primarily a line of DC to DC power converters.  The Company's
testing products are sold to companies that manufacture semiconductor
products and are shipped to locations in the U.S., Europe, Asia and Pacific
Rim countries.  Currently, services are provided principally to only two
customers, one in the U.S. (Durham, North Carolina) and one in Singapore. 
Power sources are sold to U.S., European and Asian based companies that
design and sell electronic equipment.

    The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned.  All
significant intercompany balances and transactions have been eliminated in
consolidation.  

    The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X.  Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.  In the opinion of management, adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.  Operating results for the interim period
ended June 30, 1997 are not necessarily indicative of the results that may
be expected for the year.  For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1996.

Accounting Estimates
--------------------

  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 revenues and expenses during the
reporting period.  Actual results may differ from those estimates.

Cash Equivalents 
----------------

    For the purposes of the statements of cash flows, the Company considers
all highly liquid cash investments with maturities of three months or less,
when purchased, to be cash equivalents.





                                    8
<PAGE>

                        RELIABILITY INCORPORATED
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              June 30, 1997

Earnings Per Common Share
-------------------------

    Earnings per common share ("EPS") amounts have been computed based on
the weighted average number of common shares outstanding.  Effective with
the quarter ended September 30, 1997, the effect of dilutive common stock
equivalents related to stock options outstanding under the 1997 Stock Option
Plan will be considered in EPS computations.
  
    In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 - "Earnings per Share"
("SFAS 128") which specifies the computation, presentation and disclosure
requirements for EPS.  SFAS 128 replaces the presentation of primary and
fully diluted EPS pursuant to Accounting Principles Board Opinion No. 15 -
"Earnings per Share" ("APB 15") with the presentation of basic and diluted
EPS.  The Company is required to adopt SFAS 128 with its December 31, 1997
financial statements and restate all prior-period EPS data.  The Company
will continue to account for EPS under APB 15 until that time.  When
adopted, the new standard is not expected to have a significant effect on
EPS amounts.

Inventories
-----------

    Inventories are stated at the lower of standard cost (which approximates
first-in, first-out) or market (replacement cost or net realizable value)
and include (in thousands):
                                                 June 30,    December 31,
                                                   1997          1996

    Raw materials                                 $1,545        $1,874
    Work-in-progress                               3,115           872
    Finished goods                                   289           413
                                                  ------        ------
                                                  $4,949        $3,159
                                                  ======        ======

    Inventories are presented net of reserves for excess and obsolete
inventories of $1,287,000 and $1,509,000 at June 30, 1997 and December 31,
1996, respectively.  


















                                    9
<PAGE>

                        RELIABILITY INCORPORATED
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              June 30, 1997

Income Taxes
------------

    The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). 
Under SFAS 109, deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.  The provision
for income taxes includes federal, foreign, and state income taxes. 
Deferred tax assets are recognized, net of any valuation allowance, for
deductible temporary differences and net operating loss and tax credit
carryforwards.  Deferred tax expense represents the change in the deferred
tax asset or liability balances. 

    The differences between the effective rate reflected in the provision
for income taxes on  income  before  income taxes and the amounts determined
by applying the statutory U.S. tax rate of 34% are analyzed below (in
thousands) for the six month periods ended:
                                                         June 30,
                                                   1997          1996

    Provision at statutory rate                   $1,566        $1,013
    State income taxes                                54            53
    Change in valuation allowance                    (45)            -
    Tax effects of:
      Foreign losses for which a tax benefit is
        not available                                 95             -
      Foreign tax benefit of export processing
        exemption                                      -           (63)
      U.S. tax on undistributed foreign earnings    (151)            -
    Other                                             26             1
                                                   -----         -----
        Provision for income taxes                $1,545        $1,004
                                                   =====         =====

    Effective January 1, 1997, the Company changed its policy with respect
to providing U.S. income taxes on undistributed earnings of a foreign
subsidiary.  Increasing demand for services provided by the subsidiary
necessitates permanently reinvesting future earnings of the subsidiary, thus
deferred U.S. income taxes will not be provided after January 1, 1997.


















                                   10
<PAGE>

                        RELIABILITY INCORPORATED
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              June 30, 1997

2.  LONG-TERM DEBT AND SHORT-TERM BORROWINGS

    Long-term debt consisted of the following (in thousands):

                                                 June 30,   December 31,
                                                   1997         1996

    Revolving declining term loan with interest
      at prime minus 1/4%                         $2,706       $    -
    Mortgage payable; due in monthly install-
      ments of $26,777 ($46,777 as explained
      below), including interest at 9%             2,148        2,328
                                                  ------       ------
                                                   4,854        2,328
    Less current maturities                          384          367
                                                  ------       ------
    Long-term debt due after one year             $4,470       $1,961
                                                  ======       ======

    The mortgage was payable in 180 equal monthly installments, including
interest at 9%.  The Company began paying an additional principal payment
of $10,000 each month effective March 1, 1996 and increased the additional
payment to $20,000 each month effective October 1, 1996.  Current maturities
as of June 30, 1997 assume the Company will continue making the additional
$20,000 principal payment, resulting in the note being paid in full in 84
payments.  The mortgage is collateralized by land and a building.

    In March 1997, the Company amended its Loan Agreement with Wells Fargo
Bank Texas, N.A. to increase its credit availability from $2.0 million to
$7.5 million and to extend the term of the Loan Agreement to March 31, 2003. 
Interest is payable at the bank's prime rate minus 1/4% (8-1/4% at June 30,
1997).  The amendment provided for a revolving declining line of credit,
secured by substantially all assets of the Company which are located in the
U.S., except for land and buildings.  The agreement provides initial credit
availability of $7,500,000.  The amount available reduces by $500,000 semi-
annually, beginning on October 1, 1997 until October 1, 2002. At October 1,
2002, the available amount will be $2,000,000, until  expiration of the
agreement on March 31, 2003.  Principal payments are due as credit
availability declines, if the outstanding principal amount exceeds the
commitment amount.  The amendment prohibits the payment of dividends by the
Company unless otherwise agreed to by the bank.  The credit facility
requires compliance with certain financial loan covenants related to
tangible net worth, current ratio, liabilities to tangible net worth and
debt service coverage.  The Company was in compliance with the financial
requirements of the agreement at June 30, 1997.

    The Company's Singapore subsidiary maintains an agreement with a
Singapore bank to provide an overdraft facility to the subsidiary of 500,000
Singapore dollars (U.S. $350,000) at the bank's prime rate plus 1% (7% at
June 30, 1997).  There were no balances outstanding at June 30, 1997, but
amounts utilized under letter of credit commitments totalled $137,000,
resulting in credit availability of $213,000 at June 30, 1997.  The loan is
collateralized by all assets of the subsidiary and requires maintenance of
a minimum net worth of the Singapore subsidiary.  Payment of dividends
requires written consent from the bank, and continuation of the credit
facility is at the discretion of the bank.


                                   11
<PAGE>

                        RELIABILITY INCORPORATED
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              June 30, 1997

    Interest expense (income), for the six month periods ended June 30, is
presented net as follows (in thousands):
                                                   1997         1996
                                                     
    Interest expense                               $ 196         $117
    Interest (income)                               (103)         (59)
                                                    ----         ----
    Interest expense, net                          $  93         $ 58
                                                    ====         ====

3.  TREASURY STOCK PURCHASE

    In March 1997, the Company purchased 1,270,221 shares of its common
stock from a stockholder for $6.50 per share. Shareholders approved the 1997
Stock Option Plan (see Note 5) in April 1997 and the stock may be used to
issue shares under the option plan.  The stock may also be used to fund the
Company's contributions to its 401(k) employee benefit plan.

4.  COMMITMENTS

    A subsidiary of the Company leases a conditioning services and office
facility under a non-cancelable operating lease agreement, expiring in 2000. 
Future minimum rental payments under the lease at June 30, 1997 are:
1997 - $145,000; 1998 - $310,000; 1999 - $329,000; and 2000 - $142,000.

    The Company leases manufacturing and office space in its U.S. facility
to a third party under an agreement expiring in January 2001.  Future income
under the lease will be:  1997 - $89,000; 1998 - $179,000; 1999 - $179,000;
2000 - $179,000; subsequent to 2000 - $15,000.

    The Company's Durham services operation moved to a larger facility in
1996.  The Company leases space which was vacated by the Durham operation
under a non-cancelable operating lease agreement which expires in January
1998.  The Company has sub-leased the facility for the remaining term of the
lease.  

5.  STOCK OPTIONS

    In February 1997, the Company's Board of Directors adopted, and in April
1997 the shareholders approved the 1997 Stock Option Plan under which
500,000 shares of Common Stock were made available for future grants.  The
Plan permits the granting of both incentive stock options, as defined under
the Internal Revenue Code, and non-qualified options to directors, executive
officers and other key employees of the Company and its subsidiaries.  The
term of each option will be fixed by the Plan Administrator and may not
exceed 10 years for incentive stock options.  The exercise price is the fair
market value of the Company's Common Stock on the date the option is
granted.  In February 1997, the Board of Directors granted options for
170,000 shares of Common Stock at $7.00 per share.

    The Company has elected to follow Accounting Principles Board Opinion
No. 25 - "Accounting for Stock Issued to Employees" ("APB 25") in accounting
for the 1997 Stock Option plan because the alternative fair value accounting
under Statement of Financial Accounting Standards No. 123 - "Accounting for
Stock Based Compensation" requires the use of option valuation models that 



                                   12

<PAGE>

                        RELIABILITY INCORPORATED
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                              June 30, 1997


were not developed for use in valuing employee stock options.  Under APB 25,
compensation expense is recognized only to the extent the exercise price of
stock options exceeds the fair value of the Company's common stock on the 
date of grant, if any.





















































                                   13
<PAGE>

                        RELIABILITY INCORPORATED
                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                              June 30, 1997

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

FINANCIAL CONDITION

    The primary sources of Reliability's liquidity are cash provided by
operations and retained earnings.  The Company maintains lines of credit to
supplement the primary sources of capital and, until 1995, had leased most
of its facilities, reducing the need to expend capital on such items. 
Changes in the Company's financial condition and liquidity since June 30,
1996 are generally attributable to changes in cash flows from operating
activities, the purchase of 1.3 million shares of the Company's Common Stock
in March 1997 and changes in the levels of capital expenditures.

    Certain ratios and amounts monitored by management in evaluating the
Company's financial resources and performance are presented in the following
chart.  The periods presented related to the profitability ratios are for
the six months ended June 30, and twelve months ended December 31,:

                                  June 30,    December 31,    June 30, 
                                    1997           1996         1996

  Working capital:
   Working capital (in thousands)   $9,547        $12,728       $9,904
   Current ratio                  2.5 to 1       3.8 to 1     3.2 to 1
  Equity ratios:
   Total liabilities to equity         0.8            0.4          0.4
   Assets to equity                    1.8            1.4          1.4
  Profitability ratios:
   Gross profit                       49 %           50 %         52 %
   Return on revenues                 16 %           14 %         12 %
   Return on assets (annualized)      24 %           18 %         17 %
   Return on equity (annualized)      42 %           25 %         24 %

   The Company's financial condition improved significantly throughout 1996
and has remained very strong during 1997.  The Company's current ratio and
working capital were unusually high at December 31, 1996 due to an unusually
high cash balance.  The cash balance of $8.5 million at December 31, 1996
was generated by operations during a period of declining operations. 
Working capital decreased to $9.5 million at June 30, 1997, from $12.8
million at December 31, 1996, and the ratio of current assets to current
liabilities decreased from 3.8 to 1 at December 31, 1996, to a very healthy
2.5 to 1 at June 30, 1997. Management's evaluations indicated that the
Company's Common Stock was undervalued compared to industry peers.  In March
1997, the Company purchased 1.3 million shares from a shareholder for $8.3
million.  The Company used $5.8 million of its cash balance and drew $2.5
million under its revolving term loan to purchase the stock.  The Company
obtained an increase in its line of credit from $2.0 million to $7.5 million
in March 1997.  The increase is related to the purchase of Company stock and
possible need to finance increases in inventory, accounts receivable,
capital expenditures and other working capital items.  Increases in demand
for the Company's products in late 1996 and 1997 resulted in a significant
increase in the Company's backlog in December 1996 and during the first half
of 1997. Backlog was $15.7 million at June 30, 1997, compared to $9.9
million at December 31, 1996.  The effects of operating at changing levels


                                   14
<PAGE>
                        RELIABILITY INCORPORATED
                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                              June 30, 1997

FINANCIAL CONDITION - continued

of demand for products and services have affected various elements of cash
provided by operations.  

   Net cash used by operating activities for the six months ended June 30,
1997 was $0.5 million, contrasted with $1.1 million provided in the first
six months of 1996.  The principal items contributing to the net cash used
by operations in 1997 were net income plus depreciation which totaled $3.8
million, a $1.1 million increase in accounts payable and a $0.6 increase in
income taxes payable. Cash flows provided by operations were reduced by a
$4.6 million increase in accounts receivable and a $2.1 million increase in
inventories.  The increase in inventories, accounts receivable and accounts
payable resulted from increases in production and sale of testing products. 
The increase in income taxes payable relates to the increase in net income.

   Based on currently available information, principally a forecasted
increase in demand for semiconductor products sold by our customers, the
Company's forward-looking projections indicate that revenues for 1997 should
exceed 1996 revenues by 15% to 20%.  Earnings per share in 1997 should
increase 60% to 70% due to an increase in net income and also due to a
decrease in the weighted average shares outstanding resulting from the
purchase of 1.3 million shares of Common Stock in March 1997.

   In July 1995, the Company established a credit facility with a financial
institution to provide credit availability of $2.0 million to supplement
cash provided by operations, if required.  This credit facility was not
utilized until March 1997.  The Company obtained an increase in the line of
credit to $7.5 million and converted the loan to a revolving term loan with
a maturity in March 2003. The Company could borrow an additional $4.8
million under the line of credit at June 30, 1997. The increase in the line
of credit was obtained to provide funding to purchase Company stock as
explained in the discussion above, and to provide credit availability to
support working capital and capital expenditure requirements. The Company's
Singapore subsidiary maintains a small overdraft facility to support the
subsidiary's credit commitments.  The subsidiary could borrow $213,000 under
the facility at June 30, 1997.  

   Capital expenditures during the first six months  of 1997 and 1996 were
$1.2 million and $1.0 million, respectively. Expenditures for 1997 include
equipment required by the Singapore services facility to support increased
demand for services provided by the subsidiary.  Expenditures for 1997 are
forecast to be $10.0 to $15.0 million, depending on the timing of receipt
of equipment and the amount of equipment needed to meet customer
requirements for additional capacity in the Services segment.  The Company
is currently negotiating with an existing customer to expand the production
capacity of one of its Services facilities.  The agreement would require the
Company to purchase $10.0 to $20.0 million of capital assets during the next
twelve months.  Revenues at the facility would increase as capacity is
increased.  The Company is negotiating an increase in its bank line of
credit to finance the expansion.

   The Company believes its cash and cash equivalent balances, future cash
generated from operations, available lines of credit and an increase in its
existing bank line of credit will be sufficient to meet the cash
requirements of the Company.

                                   15

<PAGE>
                        RELIABILITY INCORPORATED
                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                              June 30, 1997

RESULTS OF OPERATIONS

   Six months ended June 30, 1997 compared to six months ended June 30,
1996.

Revenues.  Revenues for the 1997 six-month period were $19.3 million
compared to $16.2 million for the 1996 period.  Revenues in the Services and
Testing Products segments increased $3.8 and $0.2 million, respectively. The
revenue increases relate to increased demand for products supplied by the
semiconductor industry, which translates to increased requirements for
products and services supplied by the Company.  Power Sources revenues
decreased $0.9 million.

   Revenues in the Testing Products segment were $8.2 million for the first
half of 1997, which is an increase of 3% over the first half of 1996. The
increase is related to increased demand resulting in volume increases and
higher unit prices due to product mix changes.  Revenues from the sale of
INTERSECT products increased $0.4 million, while revenues from the sale of
CRITERIA and loader and unloader products decreased $0.2 million.

   Revenues in the Services segment for the 1997 period were $9.3 million,
an increase of 68% compared to the corresponding 1996 period.  The increase
is related primarily to the Company's Singapore services facility and was
caused by volume increases resulting from increased demand, unit price
increases resulting from product mix changes and 68% of the increase relates
to an increase in the sale of burn-in boards to support product mix changes.

   Revenues in the Power Sources segment were $1.8 million for the first
half of 1997, reflecting a 33% decrease from the 1996 period. Revenues were
affected by general reductions in demand, an aging product line and a
decline in market penetration resulting in volume decreases. 

Costs and Expenses.  Total costs and expenses for the 1997 period increased
$1.5 million or 11% compared to the 19% revenue increase of $3.1 million. 
Cost of revenues increased $2.0 million, marketing, general and
administrative expenses decreased $0.3 million and research and development
expenses decreased $0.2 million.

   The decrease in the gross profit from 52% in the 1996 period to 49% in
the 1997 period is attributable to the Power Sources segment and, to a small
degree, the Testing Products segment.  The decrease in the gross profit in
the Power Sources segment is attributable to significant revenue decreases
resulting from volume decreases.  The gross profit in the Testing Products
segment decreased slightly due to product mix changes. The gross profit in
the Services segment increased due to volume increases and the fact that
gross profit in the 1996 period was decreased by higher costs associated
with maintaining two facilities during the first quarter of 1996 while
operations in North Carolina were moved to a new facility. 

   Marketing, general and administrative expenses for the 1997 period
decreased $0.3 million.  The decrease in expenses is related to the Testing
Products and Power Sources segments.  Expenses in the Testing Products
segment declined due to expense controls and product mix changes, resulting
in variable expense, such as warranty and installation costs, increasing at
rates slower than revenues increased.  Expenses in the Power Sources segment
decreased due to volume decreases.

                                   16

<PAGE>

                        RELIABILITY INCORPORATED
                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                              June 30, 1996

RESULTS OF OPERATIONS - continued

   Research and development expenses for the 1997 period decreased $0.2
million.  Reliability is committed to continuing a significant research and
development program and development costs are projected to remain at current
levels or increase somewhat during the remainder of the year.

   The Company's effective tax rate was 34% for the six months periods
ended June 30, 1997 and 1996.  The principal items affecting the Company's
tax rate in 1997 were tax benefits not available to a foreign subsidiary due
to net operating loss limitations, state income tax expense, U.S. tax which
was not provided on earnings of a foreign subsidiary, and a change in the
valuation allowance resulting from utilization of foreign tax credits. 
Effective January 1, 1997, the Company changed its policy with respect to
providing U.S. income taxes on undistributed earnings of its Singapore
subsidiary.  Increasing demand for services provided by the subsidiary
necessitates permanently reinvesting future earnings of the subsidiary; thus
deferred U.S. income taxes will not be provided after January 1, 1997. The
effective tax rate in 1996 was affected by a tax benefit from an export
processing exemption in Costa Rica and state income tax expense.  

Earnings Per Common Share.  Earnings per common share increased $.40 for the
1997 six month period; $.15 of the increase was due to a decrease in the
average number of shares outstanding.

   Three months ended June 30, 1997 compared to three months ended June 30,
1996.

Revenues.  Revenues for the 1997 three-month period were $12.6 million
compared to $9.4 million for the 1996 period.  Revenues in the Services and
Testing Products segments increased $2.1 and $1.4 million, respectively,
while Power Sources revenues decreased $0.3 million.  Historically revenues
in the Services segment accounted for 32% to 36% of consolidated revenues. 
Services revenues were 39% of revenues in the 1997 quarter.  

   Revenues in the Testing Products segment were $6.7 million for the
second quarter of 1997, which is an increase of 27% over the same period in
1996.  The change is related to increased shipments due to increased demand. 

   Revenues in the Services segment for the 1997 quarter were $4.9 million,
an increase of 73% compared to the corresponding 1996 period.  The change
is related primarily to the Company's Singapore services facility and was
caused by volume increases resulting from greater demand for burn-in
services and a significant increase in the sale of burn-in boards, which is
related to increased demand and product mix changes. 

   Revenues in the Power Sources segment were $1.0 million for the 1997
quarter, reflecting a 25% decrease from the 1996 period.  Revenues were
affected by the same factors noted in the six months discussion above.  

Costs and Expenses.  Total costs and expenses for the 1997 period increased
$1.6 million or 22% compared to the 34% revenue increase.  Cost of revenues
increased $1.3 million, marketing, general and administrative expenses
increased $0.4 million and research and development expenses decreased $0.1
million.  

                                   17

<PAGE>

                        RELIABILITY INCORPORATED
                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                              June 30, 1997

RESULTS OF OPERATIONS - continued


   The increase in the gross profit from 50% in the 1996 quarter to 52% in
1997 is attributable to the Testing Products and Services segments. Gross
profit as a percent of revenues in the Testing Products and Services
segments for the 1997 quarter increased due to efficiencies related to
volume increases.  Gross profit in the Power Sources segment declined due
to the significant decrease in revenues.

   Marketing, general and administrative expenses for the 1997 period
increased $1.3 million.  The increase in expenses is directly related to the
increase in Testing Products and Services revenues, which resulted in an
increase in volume related expenses, such as commissions, and incentive
compensation accruals which are related to profitability.

   The Company's effective tax rate was 32% for the three months ended June
30, 1997, compared to an effective tax rate of 34% for the 1996 period. 
Items affecting the tax rates for the quarters ended June 30, 1997 and 1996
are the same as those noted in the six months discussion above.

Earnings Per Common Share.  Earnings per common share increased $.47 for the
1997 three month period; $.23 of the increase was due to a decrease in the
average number of shares outstanding.

SAFE HARBOR STATEMENT

   "Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: Statements in this Form 10-Q regarding Reliability's business
which are not historical facts are "forward looking statements" that involve
risk and uncertainties, including, but not limited to, market acceptance of
Company products and services, the effects of general economic conditions,
the impact of competition, product development schedules, problems with
technology, delivery schedules, and supply and demand changes for Company
products and services and its customers' products and services. Actual
results may materially differ from projections.




















                                   18
<PAGE>

                        RELIABILITY INCORPORATED
                            OTHER INFORMATION

                      PART II.   OTHER INFORMATION


Items 1 through 5.

   Not applicable.

Item 6. Exhibits and Reports on Form 8-K.

   (a)  Exhibits

        27.1 Financial Data Schedule

   (b)  Reports on Form 8-K.  There were not reports on Form 10-K filed by
   the Company during the quarter ended June 30, 1997 












































                                   19

<PAGE>

                        RELIABILITY INCORPORATED
                               SIGNATURES                

                              June 30, 1997



   Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.





RELIABILITY INCORPORATED
      (Registrant)





August 8, 1997                                  Larry Edwards 
                                                President and
                                                Chief Executive Officer





August 8, 1997                                  Max T. Langley
                                                Sr. Vice President - Finance
                                                and Chief Financial Officer





























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