SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 1999
                         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)



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

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

          Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, no par value per share
                               (title of class)
                                ---------------


      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 report),  and (2) has been subject to such
filing requirements for the past ninety days.

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

      Indicate  by check mark if disclosure of delinquent  filers  pursuant  to
Item 405 of Regulation  S-K is not contained herein, and will not be contained,
to the best of registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in  Part III of this Form 10-K or  any
amendment to this Form 10-K.     x
                  -----
                                       1
<PAGE>

      State  the  aggregate  market value of the  voting  stock  held  by  non-
affiliates of the registrant.  The  aggregate market value shall be computed by
reference to the price at which the stock  was  sold,  or  the  average bid and
asked prices of such stock, as of a specific date within 60 days  prior  to the
filing date.

      $47,355,983,  based  on  the  last  sales price as reported on The Nasdaq
Stock(r) Market on March 3, 2000.

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

      Common Stock, no par value                6,668,765
            (title of class)        (number of shares outstanding)

                              as of March 3, 2000

                      Documents Incorporated by Reference

      Listed hereunder are the documents incorporated by reference and the Part
of the Form 10-K into which such documents are incorporated:

Part III                                  Proxy Statement for the 2000 Annual
                                          Meeting of Shareholders of the
                                          Registrant (to be filed within 120
                                          days of the close of the registrant's
                                          fiscal year)




























                                       2
<PAGE>
                           RELIABILITY INCORPORATED
                                   FORM 10-K

                               TABLE OF CONTENTS

                               December 31, 1999

                                    PART I

                                                                        Page

Item 1.  Business.........................................................4
Item 2.  Properties......................................................13
Item 3.  Legal Proceedings...............................................13
Item 4.  Submission of Matters to a Vote of Security Holders.............13
Item 4A. Executive Officers of the Registrant............................14

                                    Part II

Item 5.  Market for the Registrant's Common Stock and Related
            Stockholder Matters 15
Item 6.  Selected Financial Data.........................................16
Item 7.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations..........................17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......24
Item 8.  Consolidated Financial Statements and Supplementary Data.......F-1
Item 9.  Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.....................................26

                                   Part III

Item 10. Part III is omitted as the Company will file a
Item 11.    Proxy Statement for the 2000 Annual Meeting of
Item 12.    Shareholders as indicated in this report.....................26
Item 13.

                                    Part IV

Item 14. Exhibits, Financial Statement Schedules, and
            Reports on Form 8-K..........................................26
         Signatures......................................................27















                                       3
<PAGE>
                                    PART I

Item 1.    Business

     (a)   GENERAL    DEVELOPMENT   OF   BUSINESS.   Reliability   Incorporated
("Reliability") 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
design,  manufacture and sell power sources, primarily a line of DC to DC power
converters,  which  convert  direct  current  voltage  into  a  higher or lower
voltage.

     The following table shows the subsidiaries of the Company as  of  the date
of this report:

                           Reliability Incorporated
                             (a Texas corporation)
                           ------------------------

      RICR de Costa Rica, S.A.               Reliability Singapore Pte Ltd.
     (a Costa Rica corporation)                 (a Singapore corporation)

      As  used  in  this report, the terms "Company" and "Registrant" refer  to
Reliability,  its  present   subsidiaries  and  their  predecessors,  unless  a
different meaning is stated or indicated.

      The Company was incorporated  under  the  laws  of  Texas  in  1953.  All
subsidiaries are incorporated under a variant of the "Reliability" name.

      The  Company's business was started in 1971 when substantially all of the
assets of a  testing  laboratory  owned  by Texas Instruments Incorporated were
acquired  by Reliability, Inc. In 1974, the  Registrant  acquired  Reliability,
Inc.  and  began  providing  conditioning  and  testing  services.  Reliability
Singapore  Pte   Ltd.   provides   conditioning   services,  including  limited
manufacturing  of  certain  conditioning  products for  sale  to  its  services
customers. RICR de Costa Rica, S.A. began operating  in  1990  and manufactures
and sells power sources.

      The Company operates in three industry segments as discussed blow.

      TESTING AND CONDITIONING PRODUCTS ("Testing Products").

      Under  current  semiconductor  technology  and  manufacturing  processes,
manufacturers are unable to consistently produce batches of integrated circuits
("ICs" or "semiconductors") that are completely free of defects which cause the
ICs to fail. An IC may be defective at the time it is produced or it may have a
latent defect which eventually will cause it to fail. An IC with such  a defect
will  almost  always  fail  during  the first 500 to 1,000 hours of normal use.
Accordingly, it has become customary  to  "condition"  or  "burn-in" ICs (i.e.,
subject them, during a relatively short period of time, to controlled  stresses
which  simulate  the  first  several  hundred  hours  of operation) to identify
defects prior to delivery. Such conditioning subjects the  ICs to maximum rated
temperatures, voltages and electrical signals. Following burn-in,  each  IC  is
tested to determine whether it functions as designed.



                                       4
<PAGE>


      The Company manufactures equipment that performs burn-in and testing, and
a  limited  amount of equipment that performs burn-in only. The Company was one
of the first to design, manufacture and market systems that utilize burn-in and
test technology  within  the  same  product.  The Company's burn-in and testing
products  contain  sophisticated  software,  most  of  which  is  designed  and
developed  by  the  Company contemporaneously with the  related  hardware.  The
Testing Products segment provided 26% of the Company's revenues in 1999.

      The Company focuses its research and development on equipment and related
software  that  performs  functional  testing  during  burn-in  of  memory  and
micrologic devices.  This focus has led to the development of two major product
families - the INTERSECT(tm)  line  for  the  memory market (i.e., SRAM, DRAM &
SDRAM) and the CRITERIA(r) 18 line for the micrologic,  or  more  specifically,
the microprocessor device market.

      Set  forth  below is the device capacity, power dissipation and  type  of
semiconductor processed  by  each  of  the  primary  Testing  Products that the
Company currently offers:


    Burn-In and Test         Device         Power             Primary
      Product Type          Capacity    Dissipation(1)      Application
    ----------------        --------    --------------      -----------
     Criteria 18              1,152           7KW          Micrologic
     Criteria 18-HD           1,152          15KW        Microprocessors
     INTERSECT 2000 (2)      12,288             -            Memory
     ---------
     (1) Power/heat dissipation rate in kilowatts
     (2) 256 Meg DRAMS

      The Company manufactures and sells CRITERIA 18 and CRITERIA  18-HD  (High
[heat]  Dissipation)  burn-in  and  test  systems.  The  CRITERIA  18-HD system
provides a cost-effective means to perform functional testing during burn-in of
high frequency micrologic devices which dissipate large quantities of heat. The
system  also  offers  the ability to dissipate 15KW of power in an economically
sized system without having  to  use chilled water as a cooling mechanism. This
feature allows users to reduce significantly  the  amount  of  floor space used
when performing burn-in and testing of high power micrologic devices.

      Under  the  trade name INTERSECT, the Company manufactures systems  which
functionally test memory  devices  during  burn-in.  Most functional testing is
performed serially after the device is conditioned. INTERSECT  systems  perform
parallel  functional  testing during the burn-in process. The testing currently
performed by INTERSECT  systems  during burn-in has historically been performed
by serial testers capable of testing  64  individual  DRAMs  at a time. Because
INTERSECT  systems can test up to 12,288 individual DRAMs at a  time,  and  are
less expensive  than serial testers, testing costs per IC can be reduced 30% to
60%.

      INTERSECT systems  are  computer  controlled  for high volume burn-in and
testing of memory devices. The Company's INTERSECT systems  can  vary  in their
burn-in  and testing capabilities. The current generation of INTERSECT products
is based on  the  INTERSECT 30 ("I-30") technology which was developed in 1992.
The I-30 was capable of functionally testing 8,640 64 Meg memory devices during


                                       5
<PAGE>

the burn-in process  in  a single chamber. It was capable of testing MOS, CMOS,
Bipolar, ECL and BiCMOS DRAMs and SRAMs. A lower cost version of the I-30 burn-
in  and  test system called  the  INTERSECT  2000  ("I-2000")  is  the  current
generation  INTERSECT product. The I-2000 has the capacity to functionally test
12,288 256 Meg  memory  devices  during the burn-in process in a single chamber
and has become the principal product in the INTERSECT product line.

      The  Company  has  developed a  networked  burn-in  and  test  management
software  system known as RELNET(tm),  which  enables  users  of  CRITERIA  and
INTERSECT systems  to  connect multiple systems to a single host computer. This
provides users with a flexible  software tool and a convenient central location
to  monitor  system status, track burn-in  boards  and  device  lots,  schedule
equipment maintenance,  control and store test profiles, and generate and store
burn-in and testing results.

      Burn-in  and testing  products  are  designed  and  manufactured  at  the
Company's Houston, Texas facility.

      The Company  continues  to  manufacture  a limited number of burn-in only
systems marketed under the name CRITERIA. Demand  for  burn-in only systems has
declined  significantly,  and  is being replaced by demand  for  products  that
perform both burn-in and testing.  The  original CRITERIA systems were designed
for internal use in the Company's Services  segment,  but,  since  1974,  these
systems and their successors have been sold to outside customers.

      CRITERIA  and  INTERSECT  systems generally are used on new IC production
lines, but may also be added to existing  production lines. These systems burn-
in and test relatively large numbers of similar ICs at one time and are usually
purchased by companies that manufacture large  volumes of similar ICs, but they
also may be purchased by companies that independently burn-in and test ICs.

      SERVICES ("Services").

      The Company operates a Services facility in  Singapore  which offers pre-
test,  burn-in,  burn-in and test, final test and speed sort, automatic  visual
inspection, and tape  and  reel for DRAMs and SRAMs. The facility also provides
burn-in of micrologic devices, particularly microprocessors. Texas Instruments,
the principal customer of the  Singapore  Services facility, prior to 1999, was
acquired by Micron Technology ("Micron") in  October  1998.  Micron advised the
Company,  in  the  fourth  quarter  of  1998,  that it would not outsource  the
processing  of  DRAMs  of its own design. Micron stopped  using  the  Company's
services in the fourth quarter of 1999.

      In December 1998,  the  Company  acquired  assets related to two services
facilities from Basic Engineering Services and Technology  Labs, Inc. ("BEST").
The acquired facilities were located in Austin, Texas and Singapore.  The  BEST
Singapore  facility  that  was  acquired, replaced a substantial portion of the
decline in revenues that resulted  from  the  loss  of  Micron's  business. The
Austin,  Texas  facility  that  was  acquired from BEST was closed in September
1999.

      The Company's North Carolina facility  provided services to one customer,
Mitsubishi Semiconductor America, Inc. The customer  notified  the  Company  in
January  1998  that  it  was  reducing  its output of DRAMs to be burned-in and
tested  by the Company's Durham facility and  ceased  sending  product  to  the
Company in April 1998, at which time the Company closed the Durham facility.

                                       6
<PAGE>

      In  spite  of  the  numerous  difficulties  that were encountered in this
segment in 1998 and 1999, Services revenues increased  by 10% and accounted for
62% of the Company's 1999 revenues. (Reference is made to  Notes  10  and 11 of
the Company's Consolidated Financial Statements for additional information.)

      The  Company  uses CRITERIA systems and burn-in boards to provide burn-in
services. The Company  utilizes  serial testing equipment and burn-in equipment
acquired from others in certain testing procedures. Services are generally sold
on a periodically adjusted per-unit-processed basis.

      POWER SOURCES ("Power Sources")

      The operating components of  electronic equipment frequently have varying
electrical requirements. Rather than  provide  electricity  to  each  component
separately,  specialized  devices called DC-DC converters or power sources  are
used to convert direct current voltage into a higher or lower voltage. By using
small DC-DC converters, electronic  equipment  can operate from a single output
power supply, yet provide different voltages to different operating components.
These  DC-DC  converters allow designers of electronic  equipment  to  localize
power requirements,  increase  modularity  in  the  product  design, and expand
equipment  features  without  having  to  redefine  power  needs.  The  Company
specializes  in  the  1  watt  to  30  watt DC-DC converter market and designs,
manufactures and markets a wide range of  power  sources  classified  into  the
various  product  series.  The  Power  Sources segment accounted for 12% of the
Company's revenues in 1999.

      Products in the Power Sources segment are generally based on the V-PAC(r)
which was introduced in 1972. The V-PAC  is  a  DC-DC converter compatible with
electronic equipment assembly operations, and today  is  a  minor  product. The
principal  products  the  Company  currently manufactures are the (1) the  LAN-
PAC(tm), a power source designed to  operate  with  Local Area Network computer
applications; (2) the S-PAC(tm), a smaller 1 watt unit  which is similar to the
V-PAC;  (3)  the  Q-PAC(tm),  which  is  a  replacement for the  V-PAC  and  is
compatible with electronic assembly operations;  (4)  the  Z-PAC(r), which is a
high  efficiency  DC-DC power source; and (5) the TELECOM-PAC(r),  which  is  a
power source designed for the telecommunications industry.

      The Company is  continually  developing and introducing additional models
of DC-DC converters, which increases  the number of higher wattage units in the
product line. In addition, the Company  continues  to  convert to surface mount
technology  for manufacturing power source products. Surface  mount  technology
removes  the  human  element  from  certain  manufacturing  processes,  thereby
enhancing the reliability  of  the  power  sources.  The technology also allows
product assembly in smaller packages and therefore provides higher power output
from smaller units.

      Power sources are designed at the Company's Houston,  Texas  facility and
are manufactured in the Company's Costa Rica facility.

      (b)   FINANCIAL   INFORMATION  ABOUT  INDUSTRY  SEGMENTS.  The  Company's
business is divided into  three  industry segments - (i) manufacture of testing
and conditioning products (Testing  Products),  (ii),  services which condition
and  test  integrated  circuits  as a service to others (Services),  and  (iii)
manufacture of power sources (Power Sources).  The information included in Note



                                       7
<PAGE>
5  of  the  Company's  Consolidated Financial  Statements  provides  additional
information regarding the Company's industry segments.

      (c) NARRATIVE DESCRIPTION  OF  BUSINESS.  The  business of the Company is
generally  described  in  part  (a)  of  this Item 1. The following  paragraphs
provide additional information concerning  various  aspects  of  the  Company's
business. Unless otherwise indicated, the information provided is applicable to
all industry segments in which the Company operates.

      (i)   PRINCIPAL  PRODUCTS.  Information as to the principal products  and
services of the Company is given in  part  (a)  of  this  Item  1.  The Testing
Products  segment of the Company's business has historically been the  dominant
segment. The  Services  segment was the dominant segment in 1999. The following
table sets forth the percentage  of  the  Company's  total revenues by business
segment:

                                                     Years Ended December 31,
                                                      -----------------------
      Business Segment                                1999     1998    1997
      ----------------                                ----     ----    ----
      Testing Products                                 26%      64%     50%
      Services                                         62       28      43
      Power Sources                                    12        8       7
                                                      ---      ---     ---
      Total revenues                                  100%     100%    100%
                                                      ===      ===     ===

      Reference  is  made  to  Note  5 of the Company's Consolidated  Financial
Statements for additional information.

      (ii)  NEW PRODUCTS. During 1999,  Reliability's  Testing Products segment
began development of the key building blocks required for  its  next generation
of  testing  products  systems.  The  systems  are  being designed to meet  the
technical challenges created by the continuously shrinking  geometries  of  the
new generations of memory and microprocessor devices. This trend toward smaller
feature  sizes  has  enabled  the  semiconductor  industry  to  package  higher
functionality  at  increasing  operating  frequencies  into smaller and smaller
packages. For Reliability and other equipment suppliers  to  the  semiconductor
industry,  the  challenge  will  be  to  provide  systems that operate at  high
frequencies and lower voltages, while supplying up  to  ten  times more current
per device. With this goal in mind, the Testing Products segment  has  embarked
on  a  number of development projects that specifically target high speed  test
and interface electronics, the delivery and control of large amounts of current
at very  low  voltages,  thermal  management  techniques to tightly control the
ambient  temperature gradient while handling large  variations  in  dissipation
from device  to  device, and methods of dissipating higher power in the chamber
at lower operating  temperatures.  Some of the features that are developed will
be introduced as retrofits to existing  testing  systems  over  the next two to
three  years.  Many  of  the  features  will only be economical, however,  when
offered on new systems.

      The  power  source  market  is  demanding   devices  that  function  more
efficiently,  driven  by a requirement for higher wattage  devices  in  smaller
packages. During 2000,  the Company will expand the 1 to 2 watt miniature DC-DC
family to include regulated units in both SIP (through-hole) and DIP (surface-



                                       8
<PAGE>

mountable) packages. In addition,  the  Company  will  incorporate  synchronous
rectification  into  selected  models,  thus  providing  the  efficiency levels
required by higher wattage, lower  voltage, smaller  footprint  converters. The
Company  introduced,  over  the past three years, additional models  in  a  new
series of wide input range (up  to  65 watts) DC-DC converters, which increased
the number of higher wattage units in  the  product line. The Company continues
to convert to surface mount technology for manufacturing power source products.
During  1999,  over  80%  of  the  units  shipped  incorporated  surface  mount
technology,  compared  to  70%  in  1998  and 40% in 1997.  The  Company  began
shipping,  in  1999,  1  and  2 watt, surface mountable,  Q-PAC  converters  to
customers. Also during 1999, the  Power  Sources  segment  designed and shipped
samples  of  four custom converters and nine special designs to  meet  specific
applications for target customers. This represents the highest number of custom
and special power  sources designed and shipped in one year since the beginning
of the segment. Two  of  the custom converters will provide the basis for a new
family of high-density low-cost  1  to  2  watt miniature DC-DC converters. The
Company has also started to design its first triple output converter.

      (iii) RAW MATERIALS AND INVENTORY. The Company's products are designed by
its engineers and are manufactured, assembled,  and tested at its facilities in
Houston, Texas; San Jose, Costa Rica; and, to a limited  degree,  in Singapore.
The  Company's  products  contain  certain  parts  which  it  manufactures  and
components  purchased  from  others.  Some  metal  fabrications and subassembly
functions are performed by others for the Company.

      The  Company  maintains  an inventory of components  and  parts  for  its
manufacturing activities. There  are many sources for most of the raw materials
needed for the Company's manufacturing  activities,  although  a few components
come  from  sole  sources.  The  Company  has  not  experienced any significant
inability to obtain components or parts, but does experience  occasional delays
in receiving certain items.

      (iv)  PATENTS, TRADEMARKS. Because of rapidly changing technology  in the
electronics industry, the Company believes its future success is dependent more
on  the  quality  of  its  products  and  services, the technical skills of its
personnel, and its ability to adapt to the  changing  technological environment
than on protection of proprietary developments and inventions.  The Company has
patents and pending patent applications in the United States and  certain other
countries on components of its testing and conditioning products and  ancillary
equipment,   including   the  EX-SERT(tm)  backplane,  a  thermally  conductive
mechanical device (heat-sink),  a  method  of IC extraction during unloading of
burn-in boards and a floating-head mechanism  used  in  loading  and  unloading
burn-in  boards.  The  Company  considers  certain  of  its  patents  or patent
applications to be significant, but not material, to the Company's business.

      The  Company  has  certain trademarks which are registered with the  U.S.
Patent and Trademark Office  for  use  in  connection  with  its  products  and
services,  including  "ri  (and  design),"  "RELIABILITY," "CRITERIA," "V-PAC,"
"Z-PAC," "INNOVATION," and "TELCOM-PAC." In addition,  the Company uses certain
other  tradenames  which  are not presently registered, including  "INTERSECT,"
"RELNET," "EX-SERT," "UNLOADER," "S-PAC," "Q-PAC," "ISDN-PAC," "RK-94," "SERIES
1000," "CRITERIA 18-HD," "I-2000"  and  others  not  listed here which are used
less frequently.  The Company relies on copyrights and trade secrets to protect
its computer software.



                                       9
<PAGE>
      The  Company  has  in  the past and will in the future  take  appropriate
action to protect all of its patents, copyrights, trade secrets and trademarks,
as well as its other proprietary rights.

        (v)  SEASONALITY.  The Company's  business  is  not  seasonal,  but  is
cyclical,  depending  on  the  electronics   manufacturing   and  semiconductor
industries.

      (vi)  WORKING  CAPITAL.  The  Company  finances its inventory  and  other
working capital needs out of internally generated  funds  and  has  in the past
used  periodic  borrowings  to  finance  its  needs. The Company has short-term
credit facilities on which it could draw additional funds. Reference is made to
Note  3  of  the  Company's Consolidated Financial  Statements  for  additional
information as to the credit agreements under which working capital is or could
be available if required.

      (vii) MAJOR CUSTOMERS. The products and services offered by the Company's
Testing Products and  Services  segments  are used by manufacturers or users of
very  large  quantities  of  semiconductor devices  or  ICs.  Accordingly,  the
potential customer base is limited, due to the fact that there are only a small
number of companies that have  a  need  to  test and condition large batches of
devices  or  ICs.  Loss  of  a  customer in a limited  market  environment  can
adversely affect the Company.

      In 1999, Advanced Micro Devices,  Inc. ("AMD") and Motorola Semiconductor
Products Sector ("Motorola") accounted for  39% of consolidated revenues; these
same customers accounted for only 2% and 0% of  consolidated  revenues  in 1998
and  1997,  respectively.  In 1999, 1998 and 1997, Intel Corporation ("Intel"),
International Business Machines  Corporation  ("IBM"), Mitsubishi Semiconductor
America,  Inc  ("Mistubishi")  and  Texas  Instruments   Incorporation   ("TI")
accounted  for 25%, 88% and 90% of consolidated revenues. AMD and Motorola  are
customers of  the Services segment only, and Intel and IBM are customers of the
Testing Products segment only.

      The Company has operated Service facilities in Durham, North Carolina and
Austin, Texas. When the sole customer at each of such facilities (Mitsubishi in
Durham in 1998  and  Motorola  in  Austin in 1999) informed the Company that it
would significantly decrease the amount  of  product  sent for testing or would
cease  using  the  Company's  services  altogether,  the  Company   closed  the
facilities.  In  1998,  upon  the  sale  by TI of its DRAM operations to Micron
Technology ("Micron"), the Company was informed  that Micron would decrease the
amount of products sent for testing and ultimately  stopped  sending product in
1999.  In  1999,  the  Company  restructured  its  Singapore Services  facility
capabilities in response to changes in demand for services at the facility.

      The Company believes that its relationships with  its customers are good.
In  the  Power  Sources segment, decreased business from one  customer  may  be
replaced by new or  increased  business  from  other customers, but there is no
assurance  that  this  will  occur.  The loss of other  major  customers  or  a
significant reduction in orders from a  major  customer in any business segment
and the failure of the Company to obtain other sources  of  revenue has had and
could,  in  the  future,  have  a  material adverse impact on the Company.  The
Company has no long-term contracts with its major customers.





                                      10
<PAGE>


      (viii) BACKLOG. The following  table  sets forth the Company's backlog at
the dates indicated:
                                                               December 31,
                                                               ------------
      Business Segment                                        1999       1998
      ----------------                                        ----       ----
                                                              (In thousands)
      Testing Products                                       $2,133     $1,360
      Services                                                   58        182
      Power Sources                                             190        245
                                                             ------      -----
        Total                                                $2,381     $1,787
                                                             ======      =====

      Backlog for sales of Testing Products and Power Sources represents orders
for  delivery  within 12 months from the date on  which  backlog  is  reported.
Backlog for Services  represents  orders  for  services  where  the  ICs  to be
conditioned  have been delivered to the Company and orders for testing products
(for delivery within 12 months from the date on which backlog is reported) that
are directly related  to  providing  services  to customers. Approximately $2.0
million of the Testing Products backlog at December  31,  1999  is for products
that  are  scheduled  for  delivery  in the first four months of 2000.  Revenue
therefrom will be recorded at the time  the  products  are  delivered,  but the
customer  will pay for the total order, under a written contract, in 23 monthly
installments,  beginning  in January 2000. The Company's backlog as of December
31, 1999 is believed to be  firm,  although  portions  of  the  backlog are not
subject to legally binding agreements.

      (ix)  GOVERNMENTAL  BUSINESS.  The Company does not carry on  a  material
amount of business with any governmental agency.

      (x)   COMPETITION. The markets for  the  Company's  products and services
are  subject to intense competition. The Company's primary competitors  in  the
Testing  Products  segment  are other independent manufacturers of such systems
and manufacturers of ICs who design their own equipment. The primary methods of
competition in this segment are  quality,  product features, service, delivery,
and price. The Company believes that its service  after the sale, including its
ability to provide installation, maintenance service, and spare parts, enhances
its competitiveness.

      The primary areas of competition for the Company's  Services  are  price,
service level and geographic location. The Singapore Services facility provides
services  to  a  small number of major IC manufacturers in Singapore and, to  a
limited degree, to companies in Southeast Asia that manufacture and use ICs.

      The world market  for  power sources is divided into the merchant and the
captive markets. There are less  than  1,000 competitors in the merchant market
of the power sources manufacturing business,  most of which target a particular
application for their business. The Company believes there are approximately 20
significant  competitors whose products compete  directly  with  those  of  the
Company in its  U.S.  and  foreign  markets.  Competition  in the Power Sources
segment is based primarily on the specific features of the power sources, price
and quality.



                                      11
<PAGE>


     (xi)   RESEARCH.   The   demands   of   the  semiconductor  industry   for
increasingly  complex  and  sophisticated equipment  requires  the  Company  to
continuously  develop new products  and  to  review  and  modify  its  existing
products and services  to  adapt  to  technology  changes  in the industry. The
Company  also  focuses  on  the  development  of options for its INTERSECT  and
CRITERIA product lines. In 1999, 1998 and 1997, the Company spent $1.7 million,
$2.0  million  and  $1.6  million, respectively, on  research  and  development
activities. Development projects,  which  are  related  to the Testing Products
segment,  account  for  a  significant  portion  of  research  and  development
expenditures.

      (xii) ENVIRONMENTAL MATTERS. The business of the Company is  not expected
to  be affected by zoning, environmental protection, or other similar  laws  or
ordinances.

      (xiii) EMPLOYEES. On December 31, 1999, the Company had 345 employees, of
which  17  were contract or temporary employees. The Company's continued growth
depends on its  ability  to  attract and retain its technical staff and skilled
employees. During recent years, the Company has experienced a low turnover rate
among its U.S. employees. Due  to  the  low  unemployment  rate  in  Singapore,
turnover  at  the Singapore subsidiary has been high. Turnover at the Company's
Austin and Singapore  facilities  increased in 1999. The increase was primarily
related to changes in production levels  and  closure  of  the Austin facility,
resulting in the facilities needing fewer employees.

      (d)   FINANCIAL  INFORMATION  ABOUT FOREIGN AND DOMESTIC  OPERATIONS  AND
EXPORT SALES. See Note 5 to the Company's Consolidated Financial Statements for
a  table  showing information about foreign  and  domestic  operations  of  the
Company for the last three years.

Item 2. Properties

      The Company's  headquarters, including its manufacturing and research and
development facility for  testing  and  conditioning  products, is located in a
131,000  square  foot facility on a seven acre tract of land  in  Park  10,  an
office and industrial  park  on Interstate Highway 10, located on the west side
of Houston. The Company leased  this  facility  until March 1995, at which time
the Company purchased the facility. The Company financed  the  purchase  of its
headquarters; during the first quarter of 1999, all indebtedness related to the
facility was paid. The Company occupies 96,000 square feet in the building  and
leases the remaining 35,000 square feet to an unrelated party.

      A  subsidiary  of  the  Registrant  leases two facilities totaling 46,000
square  feet in Singapore. The Singapore facilities  are  devoted  to  Services
operations.  The Austin, Texas Services facility occupied 16,000 square feet of
leased space.  The  facility  has been sub-leased for the remaining term of the
lease. A subsidiary of the Registrant  owns  a 29,500 square foot building in a
free trade zone in San Jose, Costa Rica. The subsidiary  utilizes 22,600 square
feet  in  the  building  for  the manufacture of power sources.  The  San  Jose
facility is not subject to any  encumbrance. See Notes 3 and 8 to the Company's
Consolidated Financial Statements  for  information concerning encumbrances and
leases.

      The Company considers its properties  suitable  and  sufficient  for  its
needs and has no plans to expand or relocate.

                                      12
<PAGE>


      The  Company owns land and a 43,500 square foot building in Durham, North
Carolina. The Durham facility is not occupied and is listed for sale.

Item 3. Legal Proceedings.

            Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

            Not applicable.














































                                      13
<PAGE>

Item 4A.    Executive Officers of the Registrant.

      The following table sets out certain information regarding each executive
officer of the Company:

                                     Officer of
                                     Reliability      Position Currently Held
                                    Incorporated       Held with Reliability
              Name            Age       Since              Incorporated
              ----            ---    -----------      -----------------------

      Larry Edwards           58        1981          Chairman of the Board
                                                          of Directors,
                                                        President and Chief
                                                         Executive Officer

      Max T. Langley          53        1978          Senior Vice President,
                                                     Chief Financial Officer,
                                                      Secretary and Treasurer

      James M. Harwell        45        1993              Vice President

      Paul Nesrsta            43        1993              Vice President

      J.E. (Jim) Johnson      54        1994              Vice President

      Mr. Edwards has been President and Chief Executive Officer of the Company
since 1993 and  became  a  Director  and  Chairman of the Board of Directors in
1995. Mr. Edwards has been employed by the  Company in various capacities since
1977.

      Mr. Langley has held his present position for more than five years.

      Mr. Harwell has been Vice President, Manufacturing Operations since 1996.
He was Vice President, Site Services from 1993  until 1996 and was the division
manager of the automation equipment division of the Company from 1991 to 1993.

      Mr. Nesrsta has been Vice President, Sales  and  Marketing since 1996. He
was Vice President, Testing Products Marketing from 1993  until  1996  and  was
manager  of  the  test systems division of the Company for more than five years
prior to becoming a vice president in 1993.

      Mr. Johnson has been Vice President, Engineering since September 1997. He
was Vice President  of  Engineering  for  Fusion Semiconductor from August 1996
until September 1997. He was Vice President,  Systems  Division  of Reliability
Incorporated for more than five years prior to August 1996.











                                      14
<PAGE>

                                    PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder
            Matters.

      The  common  stock  of  Reliability  trades on The Nasdaq Stock Market(r)
under the stock symbol REAL. The high and low sale prices for 1999 and 1998, as
reported by The Nasdaq Stock Market, are set forth below.

                                  First      Second       Third      Fourth
                                 Quarter     Quarter     Quarter     Quarter
                                 -------     -------     -------     -------
      1999
      ----
      High                       $ 6.13      $ 5.81      $ 6.44      $ 3.75
      Low                          3.50        3.56        3.44        2.25

      1998
      ----
      High                       $16.75      $16.00      $12.13      $ 6.50
      Low                          9.56        8.00        3.75        3.38

      The Company paid no cash dividends in  1999  or 1998. The Company intends
to retain earnings for use in its business and therefore  does  not  anticipate
paying dividends in the foreseeable future.

      The Company has only one class of stock, which is common stock with  full
voting  rights.  In 1999 and 1998, the Company sold and issued shares of common
stock to its Employee  Stock  Savings  Plan  and to key employees, officers and
directors who exercised stock options. All common  stock  shares that were sold
to the stock savings plan and under the stock option plan in 1999 and 1998 were
registered under Registration Statements on Form S-8.

      Reliability   had  approximately  739  shareholders  of  record   as   of
February  11,  2000.  Management   estimates   there  are  approximately  4,000
beneficial owners of Reliability common stock.





















                                      15
<PAGE>

Item 6. Selected Financial Data.

      The following table sets forth certain selected  financial  data  for the
years indicated:

                                            Years Ended December 31,
                                    -----------------------------------------
                                    1999     1998     1997     1996     1995
                                   ------   ------   ------   ------   ------
                                      (In thousands, except per share data)

Revenues                          $16,551  $33,543  $47,220  $35,760  $33,930
Cost of revenues                   10,750   16,330   23,653   18,027   16,837
                                  -------   ------   ------   ------   ------
Gross profit                        5,801   17,213   23,567   17,733   17,093

Expenses:
   Marketing, general and
      administrative                5,540    8,383    9,679    8,043    8,862
   Research and development         1,654    2,009    1,578    2,197    2,227
   Provision for shut-down and
      restructuring                   800      607        -        -        -
   Interest (income) expense, net    (649 )   (491 )     66       53       60
                                   ------   ------   ------   ------   ------
      Total expenses                7,345   10,508   11,323   10,293   11,149
                                   ------   ------   ------   ------   ------
Income (loss) before income taxes  (1,544 )  6,705   12,244    7,440    5,944
Provision (benefit) for
   income taxes                      (288 )  2,468    4,112    2,594    1,881
                                   ------   ------   ------   ------   ------
Net income (loss)                 $(1,256 ) $ 4,237 $ 8,132  $ 4,846  $ 4,063
                                   ======   ======   ======   ======   ======

Earnings (loss) per share (1):
   Basic                          $  (.19 ) $   .69 $  1.25  $   .57  $   .48
   Diluted                           (.19 )    .68     1.23      .57      .48

Weighted average shares (1):
   Basic                            6,628    6,111    6,500    8,486    8,486
   Diluted                          6,628    6,201    6,604    8,486    8,486

Total assets                      $28,649  $33,246  $29,801  $26,603  $23,727
Working capital                    16,401   15,159   11,906   12,728    8,504
Property and equipment, net         7,595    9,536   10,682    9,257    8,979
Long-term debt                          -        -    1,560    1,961    2,482
Total stockholders' equity         26,394   27,577   20,642   19,668   14,822

(1)   The  weighted  average  number  of  shares used in the earnings per share
      calculations and earnings per share have  been adjusted to give effect to
      a  1997  two-for-one  stock  split in the form  of  a  dividend  and  the
      reduction in shares resulting  from  the  purchase of 1,270,221 shares of
      the Company's common stock in March 1997. (See  Note  4  of  the Notes to
      Consolidated Financial Statements.)




                                      16
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and
            Results of Operations.

      This  Management's  Discussion  and  Analysis of Financial Condition  and
Results of Operations and other parts of this  document contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this report are based on information  available  to  the Company on
the  date  hereof,  and  the  Company assumes no obligation to update any  such
forward-looking  statements.  The   Company's   actual   results  could  differ
materially  from  those anticipated in these forward-looking  statements  as  a
result of a number  of  factors,  including  those  set forth elsewhere in this
report.

      FINANCIAL CONDITION.

      The  primary  sources of Reliability's liquidity  are  cash  provided  by
operations and working capital. The parent Company and its Singapore subsidiary
have substantial cash  available to support anticipated liquidity requirements.
The Company maintains lines  of  credit  to  supplement  the primary sources of
capital.  Changes  in  the  Company's financial condition and  improvements  in
liquidity during the three year  period  ended  December 31, 1999 are generally
attributable to changes in cash flows from operating  activities, including the
effect  of  significant declines in revenues and expenses  in  1998  and  1999,
acquiring certain  assets  from  BEST  during  1998, accelerating payments on a
mortgage during 1998 and 1999, purchasing marketable equity and debt securities
and changes in the levels of capital expenditures.  In  addition, the shut-down
of the Company's Austin Services facility in 1999 and North  Carolina  Services
facility  in 1998 and changes in operations at the Company's Singapore facility
did, during  late  1998  and  1999,  and  will  in  2000,  affect the Company's
financial condition.

      Certain  ratios  and  amounts monitored by management in  evaluating  the
Company's financial resources  and  performance  are presented in the following
table:

                                        1999        1998        1997
                                       ------      ------      ------
Working capital:
   Working capital (thousands)        $16,401     $15,159     $11,906
   Current ratio                    11.7 to 1    4.0 to 1    2.7 to 1
Profitability ratios:
   Gross profit 35%                      51%        50%
   Return on revenues                   (8)%        13%         17%
   Return on assets                     (4)%        13%         27%
   Return on equity                     (5)%        15%         39%
Equity ratios:
   Total liabilities to equity           0.1        0.2         0.4
   Assets to equity                      1.1        1.2         1.4

      The  Company's  financial  ratios improved significantly  throughout  the
three year period ending in 1999.  Working  capital  totaled  $16.4  million at
December 31, 1999, compared to $15.2 million and $11.9 million at December  31,
1998 and 1997, respectively. The ratio of current assets to current liabilities
was  11.7  to 1 at December 31, 1999, an increase from 4.0 to 1 and 2.7 to 1 at
December 31,  1998  and  1997,  respectively.  The  Company's current ratio was
unusually high at December 31, 1999 due to significant decreases in liabilities

                                      17
<PAGE>

related to the decline in production levels and cash  accumulations. Management
closely  monitored  and managed its assets, liabilities and  operations  during
1999, resulting in current  liabilities  decreasing  $3.5 million while current
assets decreased only $2.3 million. Since current liabilities  decreased  at  a
rate  faster than current assets, the current ratio increased 193% to 11.7 to 1
at December  31,  1999.  Assets,  such  as accounts receivable and inventories,
decrease during periods of declining production and are converted to cash. Cash
and cash equivalents that were available  at  December 31, 1998 and during 1999
and cash provided by certain elements of operations  were used to substantially
reduce all current liability items, purchase marketable and debt securities and
purchase  capital  assets.  Cash provided by operations in  1998  was  used  to
substantially reduce a mortgage  payable,  acquire  assets  from BEST, purchase
fixed  assets  and  increase  the  amount  of short-term interest-bearing  cash
investments.

      Significant changes and decreases in demand  for  the  Company's products
and  services  during  1999  and 1998 resulted in backlog decreasing  from  the
higher levels reported in 1997  and  the  first half of 1998 to $2.4 million at
December 31, 1999. The operating effects related  to  the  decreases in backlog
and  revenues  in 1999 and 1998 affected various elements of cash  provided  by
operations, as reflected in the Consolidated Statements of Cash Flows.

      Net cash used  by  operating  activities  for the year ended December 31,
1999 was $0.4 million compared to $11.0 million and  $9.2  million  provided in
1998  and  1997,  respectively. Significant items contributing to cash used  by
operations in 1999  were depreciation and amortization of $2.5 million, reduced
by the net loss of $1.3  million  and  $0.6  million of refundable income taxes
associated  with  the loss. Accrued liabilities  decreased  $2.0  million.  The
decrease in accrued  liabilities was primarily related to a decrease in payroll
accruals, principally  bonus  accruals,  and other decreases resulting from the
decline in production levels. Inventories  increased  $0.5  million  due to the
purchase  of inventory related to shipments scheduled during the first  quarter
of 2000. A  decrease  in  accounts receivable of $0.9 million, resulting from a
decrease in revenues, provided  cash  for operations. The Company invested $0.9
million  in  marketable  and debt securities  in  1999,  and  expenditures  for
property and equipment totaled  $0.8  million.  Payment of the balance of long-
term debt totaled $0.3 million and payment of a note  to  a shareholder totaled
$0.5  million.  In addition, a $0.8 million provision for the  shut-down  of  a
facility, $0.6 million  of proceeds from the sale of assets of the facility and
cash disbursements related  to the shut-down and restructuring reserve affected
various elements of cash flows.  The  principal  items contributing to the cash
provided  by  operations  in  1998  were  net  income  plus   depreciation  and
amortization, which totaled $6.2 million, and decreases in accounts  receivable
and  inventories  of $4.6 million and $2.8 million, respectively. Cash provided
by operations in 1998  was  reduced  by  decreases in accounts payable, accrued
liabilities and income taxes payable totaling  $3.1  million.  The  decrease in
accounts receivable, inventories and the liability accounts, in 1998,  resulted
from  a reduction in the level of revenues and backlog during the last half  of
1998.

      Capital expenditures during 1999, 1998 and 1997 were $0.9, $0.9, and $3.0
million, respectively. Expenditures during 1999 and 1998 were primarily related
to equipment used by the Singapore Services facility to provide services to its
customers. In addition, expenditures in 1998 included equipment for the Testing
Products  segment.  A  significant portion of the expenditures during 1997 were
for equipment required by  the Singapore Services facility to support increased
demand for services.
                                      18
<PAGE>

      During the 1997 to 1999  period, the Company maintained a credit facility
with a financial institution to  provide credit availability to supplement cash
provided  by  operations, if required.  Credit  availability  provided  by  the
facility was reduced  by the Company from $4.0 million to $1.0 million in 1999.
The Company's Singapore  subsidiary  maintains  a  small  overdraft facility to
support the subsidiary's credit commitments.

      Reliability's revenue is dependent on conditions within the semiconductor
industry, and profitability is dependent on revenues and the  Company's ability
to  control  expenses.  The  Company  continues  to  enforce stringent  expense
controls  and will maintain these controls until revenues  increase  to  higher
levels. Semiconductor  manufacturers experienced good volume growth during 1998
and 1999. The Company's  Testing  Products  segment  is  dependent  on  capital
expenditures  by  semiconductor  manufacturers.  The  semiconductor industry is
highly  cyclical  and experiences periods of oversupply and  excess  production
capacity. Beginning  in  late  1997,  oversupply and excess production capacity
began to affect demand for test equipment and also continued to reduce and hold
down DRAM sales prices. DRAM prices increased  in  1998  and  declined in 1999.
These factors resulted in a significant decrease in the amount  of  new  orders
for testing products and changes in demand for services sold by the Company  in
1998  and  in  1999.  Demand  for  testing products sold by the Company remains
relatively weak during the early months  of  2000, but indications are that the
demand may increase during 2000. The acquisition of certain services activities
from  BEST  in  December  1998 resulted in revenues  in  the  Services  segment
increasing in 1999.

      Based  on  the  Company's  current  backlog  level  and  the  uncertainty
concerning demand for the  Company's  products  during 2000, Reliability is not
currently providing a revenue forecast for the year  ending  December 31, 2000.
The current forward-looking forecast indicates revenues for the  first  quarter
of  2000  to  be approximately $3.5 million to $4.5 million, compared to fourth
quarter 1999 revenues of $2.3 million and $4.3 million for the first quarter of
1999. The Company  is  beginning to see some signs that new orders may increase
in the near future. Some  of  these  signs are increases in demand for products
sold by the semiconductor industry, increases in inquiries by certain customers
and certain customers forecasting a need  for  new  and  retrofit  capacity. In
general,  these  signs provide some visibility indicating that demand  for  the
Company's products  should  increase, but the actual timing of when an increase
will occur is difficult to forecast.

      Current projections indicate  that the Company's cash and cash equivalent
balances, future cash generated from  operations  and available lines of credit
will  be  sufficient  to meet the projected cash requirements  of  the  Company
during 2000.

      RESULTS OF OPERATIONS.

      OVERVIEW.  Changes  in revenues from the sale of testing products sold by
the Company during the three  year  period  ended  in 1999 reflected changes in
demand by the semiconductor industry resulting in product  mix  changes in 1998
and  volume decreases in 1999 and 1998. The acquisition of services  activities
from BEST  in December 1998 and a general increase in demand, beginning in late
1998, for services  provided  by the BEST operations at the Company's Singapore
subsidiary contributed to a 10% increase in Services  revenues during 1999. The
Company's  Austin, Texas Services   facility  provided  services principally to
one


                                      19
<PAGE>

customer and accounted for 14% of consolidated revenues for  1999. The facility
was  closed in September 1999 because the customer stopped sending  product  to
the facility.  Services  revenues  decreased  in 1998 due to the closing of the
Company's North Carolina facility and acquisition  of  the Singapore facility's
dominant customer (Texas Instruments) by Micron Technology.  These  events were
caused by significant decreases in DRAM prices in 1997 and weak prices in 1998.
The  North  Carolina  facility  accounted  for  approximately  4%  and  10%  of
consolidated revenues in 1998 and 1997, respectively. Services revenues in 1999
and  1998 were impacted by the Company's acquisition of two services operations
from  BEST  in  December  1998.  The  results  of  operations  related  to  the
acquisition have been included in the Company's operations since December 1998.
Product mix changes and price competition in the Power Sources segment resulted
in a decrease in unit volumes and a decline in total revenues in 1999 and 1998.

      REVENUES.  Consolidated revenues for 1999 decreased 51% to $16.6 million,
reflecting decreases  of  $17.2  and  $0.7  million in the Testing Products and
Power Sources segments, respectively, and an  increase  of  $0.9 million in the
Services segment. Revenues for 1998 decreased 29% to $33.5 million,  reflecting
decreases of $11.1, $1.9 and $0.7 million in the Services, Testing Products and
Power Sources segments.

      Revenues  in  the  Testing  Products  segment were $4.4 million for 1999,
which was an 80% decrease over 1998. The decrease  resulted  from the fact that
the  Company's  two  major  customers for products of this segment  implemented
programs to more effectively  utilize  their  existing  capacity and to upgrade
systems  rather than purchase new systems. In addition, one  of  the  customers
implemented a program to outsource production of certain devices. Revenues from
the sale of  INTERSECT  products  decreased  $9.4 million and revenues from the
sale  of CRITERIA products decreased $7.8. Revenues  in  the  Testing  Products
segment  were  $21.6 million for 1998, which was a decrease of 8% from the same
period in 1997.  The  decrease  was  related  to changes in demand resulting in
volume changes and product mix changes. Revenues  from  the  sale  of INTERSECT
products  decreased $2.2 million, while net revenues from the sale of  CRITERIA
and loader  and  unloader  products  increased  $0.3 million. CRITERIA revenues
increased due to an increase in the number of CRITERIA  systems  delivered to a
customer.  The increase reflected increased demand for semiconductors  sold  by
the customer.

      Revenues  in the Services segment increased 10% in 1999 to $10.2 million.
The increase was  related  to revenues from customers acquired in December 1998
from BEST. Approximately 80%  of  revenues in the Services segment in 1999 were
related to the BEST acquisition. The  Austin  facility,  which  was  closed  in
September 1999, accounted for 24% of revenues in this segment in 1999. Revenues
in  the  Services  segment  decreased  54%  in  1998  to $9.2 million. Services
revenues, in 1998, decreased at two of the Company's Services  facilities.  The
North  Carolina facility was closed in April 1998. In addition, revenues at the
Singapore Services facility decreased $7.6 million due to volume and unit price
decreases  related  to reduced demand and price competition and the acquisition
by Micron of Texas Instrument's Singapore DRAM operations. Revenues included in
the Services segment  from  the  sale  of  conditioning  products  to  Services
customers also decreased significantly during 1998 due to the same factors.

      Revenues  in  the  Power  Sources  segment  decreased 27% in 1999 to $2.0
million, after decreasing 22% to $2.7 million in 1998.  Revenues  were affected
in 1999 and 1998 by changes in demand, an aging product line, price competition
and a decline in market penetration resulting in volume decreases.


                                      20
<PAGE>


      COSTS AND EXPENSES.  Changes in costs and expenses during the  three year
period were primarily related to changes in revenues, closing and restructuring
Services facilities, acquiring Services facilities from BEST and the effect  of
stringent   expense  control  programs  during  the  period,  and  in  1999,  a
significant decrease in incentive bonuses.

      Total costs  and  expenses, excluding interest, decreased $8.6 million or
31% in 1999, compared to  the  51%  revenue  decrease of $17.0 million. Cost of
revenues decreased $5.6 million; marketing, general and administrative expenses
decreased $2.8 million; and research and development  expenses  decreased  $0.4
million. Total costs and expenses in 1999 included a $0.8 million provision for
shut-down  of  the  Austin Services facility. Expenses for 1998 included a $0.6
million provision for  restructuring  and  impairment of operations and assets.
Total costs and expenses, excluding interest  and  a $0.6 million provision for
restructuring and impairment, for the 1998 period decreased $7.0 million or 20%
compared  to  the  29%  revenue  decrease of $13.7 million.  Cost  of  revenues
decreased  $7.3  million;  marketing,   general   and  administrative  expenses
decreased  $1.3 million and research and development  expenses  increased  $0.4
million.

      The Company's  gross  profit,  as a percent of revenues, was 35% in 1999,
51% in 1998 and 50% in 1997.

      The  decrease  in gross profit from  51%  in  1998  to  35%  in  1999  is
attributable, in general,  to  the  fact  that  fixed  costs could not be fully
absorbed due to the significant revenues decreases in the  Testing Products and
Power  Sources  segments.  In  addition, the Services segment accounted  for  a
significantly higher percentage  of  total  consolidated  revenues  in the 1999
period than in the 1998 period. This resulted in a decrease in the consolidated
gross  profit  in  1999,  compared  to  1998,  because  the gross profit in the
Services  segment  is fundamentally lower than in the other  two  segments.  In
addition, the gross  profit in the Services segment decreased in 1999, compared
to 1998, due to price  competition  and  a change in product mix resulting from
the change in customers. The customers changed  due to the closing of the North
Carolina  facility  in  early  1998, the loss of the  Texas  Instruments/Micron
revenues  throughout  1999  and  adding  new  customers  related  to  the  BEST
acquisition. The increase in gross  profit  to  51%  in  the  1998  period  was
attributable  to  the Testing Products segment. The gross profit in the Testing
Products segment is  higher  than  the  gross profit in the other two segments.
Revenues in the Testing Products segment  accounted  for a significantly higher
percent  of total consolidated revenues in the 1998 period,  resulting  in  the
overall increase in gross profit in 1998, compared to 1997. Gross profit in all
three business  segments  decreased  slightly  in 1998 due to revenue decreases
related  to overall volume decreases. The gross profit  in  the  Power  Sources
segment, in  1998,  decreased  due  to  the  significant  decrease  in revenues
resulting  from volume decreases. The gross profit in the Services segment,  in
1998, decreased due to a significant decrease in revenues.

      Marketing,  general  and  administrative  expense for 1999 decreased $2.8
million or 34% over the 1998 period, compared to  a  51%  decrease in revenues.
The decrease in expenses is primarily related to a decrease in Testing Products
revenues  which  resulted  in  decreases  in volume-related expenses,  such  as
commissions, warranty and similar expenses  and,  in  all  business segments, a
decrease  in  incentive   compensation  expense   accruals which  are  directly
related



                                      21
<PAGE>


to  the decrease in profitability. The Company maintains  a  stringent  expense
control  program to monitor and decrease expenses where possible. The shut-down
of the Company's  North  Carolina  facility  in  1998 and a modest reduction in
volume-related expenses in the Power Products segment  also  contributed to the
decrease.  The  overall decrease was affected, in 1999, by expenses  associated
with the operations  acquired  from  BEST  in  December 1998 and closing of the
Austin   Services   facility   in  September  1999.  Marketing,   general   and
administrative expenses for 1998  decreased $1.3 million, or 13%, over the 1997
period, compared to a 29% decrease  in  revenues.  This  decrease was primarily
related to the Services segment and, to a lesser extent, to  the  Power Sources
segment. Expenses in the Services segment decreased due to the shut-down of the
North  Carolina  Services  facility  in  April  1998 and a decrease in variable
expenses  at  the  Singapore facility due a reduction  in  the  volume  of  ICs
processed for customers.  In addition, expenses in all three segments, in 1998,
were  reduced because incentive  compensation  accruals  declined  due  to  the
decrease  in  profitability  in  all  segments  and for the Company as a whole.
Expenses in the Power Sources segment decreased due  to  expense controls and a
decrease in personnel levels due to a reduction in revenues.  The  Company  has
maintained various measures to reduce expenses. Personnel levels were basically
unchanged  in  1999, except for termination of employees at the Austin Services
facility and a 13%  increase  in  employees at the Singapore Services facility.
The increase in Singapore resulted  from an increase in revenues related to the
BEST  acquisition.  During  1998, worldwide  personnel  levels  decreased  50%,
excluding the BEST acquisition, through attrition and workforce reductions. The
Company will ensure that its  research and development projects and its ability
to respond to customer requirements are not affected by cost control measures.

      Research and development  expenses  decreased  to  $1.7  million in 1999,
compared to $2.0 million in the 1998 period. Research and development  expenses
increased  $0.4  million in 1998. A significant portion of the expenditures  in
each of the years  related  to development of testing and conditioning products
and, in 1998, development of  new  features  for  existing  product  lines. The
Company completed development of new models of INTERSECT and CRITERIA  products
during 1995, and the new products and upgrades to the products accounted  for a
substantial  portion  of  the revenues in the three year period ending in 1999.
Reliability is committed to  continuing  a significant research and development
program, and development costs may increase in 2000.

      PROVISION FOR SHUT-DOWN AND RESTRUCTURING  The Company recorded, in 1999,
a $0.8 million provision for shut-down of its Austin facility. The facility was
closed because the operation had only one  customer  and  that customer advised
the Company that the volume of product supplied to the Company  for  processing
would be decreased. The Company's projections indicated that the facility could
not  be  operated  profitably  at  the  lower  volumes. The Company recorded  a
$507,000 provision for restructuring of its Singapore  operations  in 1998, due
to a significant reduction in the volume of ICs processed for Micron Technology
by   the  Company  in  Singapore.  The  volume  decrease  relates  to  Micron's
acquisition  of the Texas Instruments DRAM manufacturing facility in Singapore.
Micron discontinued  using  services  of the Singapore subsidiary in the fourth
quarter of 1999. In addition, during 1998,  the  Company shut down its Services
facility in North Carolina. The Company recorded a  $100,000 impairment reserve
related to the land and building located at the North  Carolina  facility.  The
carrying  value of the land and building totals $2.1 million and the assets are
classified  as  assets  held  for  sale  in  the December 31, 1999 consolidated
balance sheet.  The assets are being  actively marketed, although no assurances

                                      22
<PAGE>


can be given that they will be sold during 2000.

      INTEREST INCOME AND EXPENSE.  The changes  in  net  interest  during  the
three  year  period  reflect  an  increase in interest income and a decrease in
interest expense. Interest income increased  due  to  a significant increase in
investable  cash  in  1998,  reduced  by  a 14% decrease in cash  in  1999  and
increases in interest rates in 1999. Interest expense decreased due to the fact
the Company accelerated payments on, and paid  in full, the mortgage related to
the Houston facility.

      PROVISION FOR INCOME TAXES.  The Company's  tax  benefit  rate was 19% in
1999 and the effective tax rates were 37% and 34% 1998 and 1997,  respectively.
The  principal  items affecting the Company's tax rate in 1999, 1998  and  1997
were foreign losses  for  which a tax benefit is not available, lower effective
income tax rates related to undistributed foreign earnings and in 1998 and 1997
state income taxes. The 1997  rate  was  affected  by a change in the valuation
allowance resulting from utilization of foreign tax credits.

      NET  INCOME.   The  loss before income taxes was  $1.5  million  in  1999
compared to income before income  taxes  of  $6.7  million  for  1998 and $12.2
million for 1997. The net loss was $1.3 million in 1999 and net income was $4.2
million and $8.1 million for 1998 and 1997, respectively.

      EARNINGS  PER  SHARE.The  diluted  loss  per  share was $.19 in 1999.  An
increase in the weighted average shares, in 1999, reduced the loss per share by
$.01.  The principal item affecting the increase in shares,  in  1999,  is  the
475,000  shares  issued  in  December  1998,  related  to the BEST acquisition.
Diluted earnings per share were $.68, and $1.23 for the  years  ended  December
31, 1998 and 1997, respectively; $.04 of the 1998 earnings per share was due to
a  decrease in the weighted average number of shares outstanding. The decrease,
in 1998,  in  average shares outstanding was affected by the Company purchasing
1.3 million shares  of  its  common stock from a stockholder in March 1997. The
Company  declared a two-for-one  stock  split  as  a  100%  stock  dividend  on
September  5, 1997. Weighted average share and per share data reflect the stock
split.

      IMPACT  OF  YEAR  2000.  In prior years, the Company discussed the nature
and progress of its plans  to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts,  the Company experienced no significant disruptions
in internal business operations,  information  technology  and  non-information
technology  systems, and believes those systems successfully responded  to  the
Year 2000 date  change. The Company expensed approximately $200,000 during 1998
and 1999 in connection  with  remediating its systems. The Company is not aware
of any material problems resulting  from  Year  2000  issues,  either  with its
products,  its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors through the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.








                                      23
<PAGE>

                        FORWARD-LOOKING STATEMENTS

      From time  to  time,  the Company may publish forward-looking statements,
including those that are contained  in this report, relating to such matters as
anticipated   financial   performance,   business    prospects,   technological
developments,  new  products, research and development activities  and  similar
matters. The Private  Securities  Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that  a  variety  of  factors  could  cause  the
Company's   actual  results  and  experience  to  differ  materially  from  the
anticipated results  or  other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may affect the operations,
performance, development and results of the Company's business include, but are
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, Year 2000 compliance,
future results related to acquisitions,  and  supply and demand changes for the
Company's products and services and its customers' products and services.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

      MARKET RISK. The following discussion about  the  Company's  market  risk
includes  "forward-looking"  statements  that  involve  risk and uncertainties.
Actual  results could differ materially from those projected  in  the  forward-
looking statements.

      The  Company  is  exposed  to market risks, including interest rate risk,
price risk and foreign currency risk.  In  addition,  trade receivables subject
the Company to concentrations of credit risk. The adverse  effects of potential
changes  in  these  market risks are discussed below. The sensitivity  analyses
presented do not consider  the  effects  that  such adverse changes may have on
overall economic activity, nor do they consider  additional  actions management
may take to mitigate the Company's exposure to such changes. See  the  Notes to
the  Consolidated  Financial  Statements  for  a  description  of the Company's
accounting   policies   and   other  information  related  to  these  financial
instruments. The Company does not  engage  in speculative transactions and does
not use derivative instruments or engage in hedging activities.

      Interest Rate Risk. The Company places  its short-term investments, which
generally  have  a  term  of  less than 90 days, with  high  quality  financial
institutions, limits the amount  of credit exposure to any one institution, and
has investment guidelines relative  to  diversification and maturities designed
to maintain safety and liquidity. As of December  31,  1999,  the  Company  had
short-term  investments  totaling  $12 million. Due to the short-term nature of
these  instruments,  the carrying value  approximates  market  value.  If  2000
average short-term interest  rates  decreased  by 1.0% over 1999 average rates,
the  Company's  projected  interest  income from short-term  investments  would
decrease  by approximately $120,000. The  Company  had  short-term  investments
totaling $14  million at December 31, 1998. If 1999 average short-term interest
rates decreased  by 1.0% over 1998 average rates, the Company's interest income
from short-term investments would have decreased by approximately $140,000.

    The Company had  no debt outstanding at December 31, 1999 and projects that
it may not utilize its  $1.0  million  line  of credit during 2000. The Company
does have various letters of guarantee  outstanding under a line of credit. The


                                      24
<PAGE>

fees  for these guarantee documents are at current  competitive  rates.  Market
risk,  estimated   as  potential  increase  in  fair  value  resulting  from  a
hypothetical 1.0% decrease  in  interest  rates  under  the assumption that the
Company  would  fully utilize its $1.0 million ($4.0 million  at  December  31,
1998) line of credit,  is  (was) estimated to be not material to the Company as
of December 31, 1999 and 1998. The Company has historically maintained lines of
credit at interest rates that  fluctuate  with  the  U.S.  prime rate, thus the
Company's  historical  borrowing rates have been near or slightly  below  prime
rates. As of December 31,  1998,  the  fair  value  of the Company's total debt
outstanding  (all  of  which  bore  interest at fixed rates)  of  $0.8  million
approximated its fair value. The debt was paid in full during the first half of
1999.

       Price  Risk.  As  of  December 31,  1999  and  1998,  the  Company  held
marketable  equity  securities  with  fair  values  of  $350,000  and  $52,000,
respectively. Had market prices of  such securities declined 10% as of December
31, 1999 and 1998, the fair values of  these  instruments  would have decreased
$35,000 and $5,000, respectively. As of December 31, 1999, the  Company  held a
$500,000 bond which was converted into 562,000 shares of preferred stock of the
issuer  in January 2000. Since it is not practicable to estimate the fair value
of the convertible  bond,  as the issuer is in the very early stages of product
development and a readily determinable  market  value does not exist for either
the bond or the preferred stock, the Company is unable  to  quantify the amount
of price risk sensitivity inherent in this investment.

      Foreign Currency Risk. The Company has subsidiaries located in Costa Rica
and  Singapore.  The functional currency of the two subsidiaries  is  the  U.S.
dollar. Revenues of  the  Costa Rica subsidiary are denominated in U.S. dollars
and operating expenses are  denominated  in  the  local currency of Costa Rica.
Historically, the Costa Rica currency has been devalued frequently, relative to
the U.S. dollar, resulting in minimal exchange effects  on  the equivalent U.S.
dollar expenses of the subsidiary.

      The  Company  estimates that approximately 70% and 50% of  its  Singapore
subsidiary's 2000 revenues  and  expenses, respectively, will be denominated in
Singapore  dollars.  The  balance  will  be  denominated  in  U.S.  dollars.  A
significant portion of the subsidiary's assets, including cash investments, are
denominated  in  U.S.  dollars. Historically,  fluctuations  in  the  Singapore
dollar/U.S. dollar exchange  rates  have  not  had  a  material  effect  on the
Company.  Future  changes  in  the  exchange  rate  of  the  U.S. dollar to the
Singapore  dollar  may positively or negatively impact the Company's  revenues,
operating expenses and earnings.

    Concentrations of  Credit  Risk. The Company provides products and services
to companies in the electronics and semiconductor industries, many of which are
industry  leaders.  There are a limited  number  of  companies  which  purchase
testing products and  services  sold  by the Company. During 1999 and 1998, the
Company's  four largest customers accounted  for  approximately  64%  and  88%,
respectively,  of  consolidated  revenues.  The Company's trade receivables are
primarily denominated in U.S. dollars and are  generally due within 30 days. In
general, trade receivables are collected in a timely  manner  and  historically
bad debts have been very low. Timely collection of trade receivables  minimizes
the  currency  risk  associated with trade receivables that are denominated  in
foreign currencies.



                                     25
<PAGE>
Item 8.  Consolidated Financial Statements and Supplementary Data.

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                       AND FINANCIAL STATEMENT SCHEDULE

                                                                         Page

Report of independent auditors                                            F-2
Consolidated balance sheets at December 31, 1999 and 1998                 F-3
For each of the three years in the period ended December 31, 1999:
   Consolidated statements of operations                                  F-5
   Consolidated statements of cash flows                                  F-6
   Consolidated statements of stockholders' equity                        F-8
Notes to consolidated financial statements                               F-10
Schedule for each of the three years in the period
      ended December 31, 1999:
   II - Valuation and qualifying accounts and reserves                    S-1

      All other schedules  are  omitted  since  the required information is not
present, or is not present in amounts sufficient  to  require submission of the
schedule, or because the information required is included  in  the consolidated
financial statements and notes thereto.


































                                      F-1
<PAGE>


                        REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Stockholders
Reliability Incorporated

      We   have  audited  the  accompanying  consolidated  balance  sheets   of
Reliability  Incorporated  as  of  December  31, 1999 and 1998, and the related
consolidated statements of operations, cash flows  and stockholders' equity for
each of the three years in the period ended December  31, 1999. Our audits also
included  the financial statement schedule listed in the  Index  on  page  F-1.
These financial  statements  and  the  schedule  are  the responsibility of the
Company's  management. Our responsibility is to express  an  opinion  on  these
financial statements and the schedule based on our audits.

      We conducted  our  audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the 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  consolidated financial position
of Reliability Incorporated at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period  ended  December  31,  1999,  in conformity with  accounting  principles
generally accepted in the United States.  Also,  in  our  opinion,  the related
financial  statement  schedule,  when  considered  in  relation  to  the  basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.


                                          BY/s/ERNST & YOUNG LLP

Houston, Texas
January 28, 2000













                                      F-2
<PAGE>
                           RELIABILITY INCORPORATED
                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)

                                    ASSETS


                                                            December 31,
                                                           --------------
                                                            1999     1998
Current assets:                                             ----     ----
  Cash and cash equivalents                               $13,573  $15,702
  Accounts receivable                                       1,267    2,178
  Inventories                                               1,616    1,301
  Refundable income taxes                                     551        -
  Deferred tax assets                                         351      572
  Other current assets                                        580      441
                                                           ------   ------
     Total current assets                                  17,938   20,194

Property, plant and equipment, at cost:
  Machinery and equipment                                  13,981   14,390
  Building and improvements                                 5,021    5,023
  Land                                                        530      530
                                                           ------   ------
                                                           19,532   19,943
     Less accumulated depreciation                         11,937   10,407
                                                           ------   ------
                                                            7,595    9,536

Assets held for sale                                        2,135    2,193
Investments                                                   647        -
Goodwill, net of accumulated amortization
  of $61 and $16 in 1999 and 1998,
  respectively                                                334    1,323
                                                           ------   ------
                                                          $28,649  $33,246
                                                           ======   ======


















                            See accompanying notes.
                                      F-3
<PAGE>
                           RELIABILITY INCORPORATED
                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)


                     LIABILITIES AND STOCKHOLDERS' EQUITY



                                                            December 31,
                                                           --------------
                                                            1999     1998
                                                            ----     ----
Current liabilities:
  Accounts payable                                        $   291  $   547
  Accrued liabilities                                       1,029    3,045
  Income taxes payable                                        145      335
  Accrued shut-down and restructuring costs                    72      300
  Note payable to shareholder                                   -      534
  Current maturities on long-term debt                          -      274
                                                           ------   ------
     Total current liabilities                              1,537    5,035

Deferred tax liabilities                                      718      634
Commitments and contingencies                                   -        -

Stockholders' equity:
  Common stock, without par value; 20,000,000 shares
     authorized; 6,631,765 and 7,811,278 shares
     issued in 1999 and 1998, respectively                  9,389    9,340
  Retained earnings, net of $7,772 in treasury
     stock retired during 1999                             17,053   26,081
  Accumulated other comprehensive (loss)                      (48 )      -
  Less treasury stock, at cost, 1,206,762 shares
     in 1998                                                    -   (7,844 )
                                                           ------   ------
     Total stockholders' equity                            26,394   27,577
                                                           ------   ------
                                                          $28,649  $33,246
                                                           ======   ======

















                            See accompanying notes.
                                       F-4
<PAGE>

                           RELIABILITY INCORPORATED
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)


                                                  Years Ended December 31,
                                                  ------------------------
                                                   1999      1998    1997
                                                   ----      ----    ----
Revenues:
  Product sales                                  $10,193   $24,294 $26,908
  Services                                         6,358     9,249  20,312
                                                  ------    ------  ------
                                                  16,551    33,543  47,220
Costs and expenses:
  Cost of product sales                            7,092    10,491  11,108
  Cost of services                                 3,658     5,839  12,545
  Marketing, general and administrative            5,540     8,383   9,679
  Research and development                         1,654     2,009   1,578
  Provision for shut-down and restructuring          800       607       -
                                                  ------    ------  ------
                                                  18,744    27,329  34,910
                                                  ------    ------  ------
Operating income (loss)                           (2,193 )   6,214  12,310
Interest income (expense), net                       649       491     (66 )
                                                  ------    ------  ------
Income (loss) before income taxes                 (1,544 )   6,705  12,244
Provision (benefit) for income taxes                (288 )   2,468   4,112
                                                  ------    ------  ------
Net income (loss)                                $(1,256 ) $ 4,237 $ 8,132
                                                  ======    ======  ======
Earnings (loss) per share:
  Basic                                          $  (.19 ) $   .69 $  1.25

  Diluted                                        $  (.19 ) $   .68 $  1.23

Weighted average shares:
  Basic                                            6,628     6,111   6,500

  Diluted                                          6,628     6,201   6,604














                            See accompanying notes.
                                      F-5
<PAGE>

                           RELIABILITY INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)


                                                   Years Ended December 31,
                                                   ------------------------
                                                    1999     1998     1997
                                                    ----     ----     ----
Cash flows from operating activities:
  Net income (loss)                              $ (1,256 ) $4,237  $ 8,132
  Adjustments to reconcile net income (loss) to
     cash (used) provided by operating activities:
       Depreciation and amortization                2,538    1,916    1,613
       Provision for deferred income taxes            329      277      189
       Provision for inventory obsolescence           150       40      233
       Provision for shut-down and restructuring      800      607        -
       (Gain) loss on disposal of fixed assets       (172 )    (14 )      6
  Changes in operating assets and liabilities,
     net of effects from acquisition:
       Accounts receivable                            911    4,575   (2,565 )
       Inventories                                   (465 )  2,815   (1,230 )
       Refundable income taxes                       (551 )      -      286
       Other current assets                            28      (72 )    (52 )
       Accounts payable                              (256 ) (1,112 )    959
       Accrued liabilities                         (2,016 ) (1,637 )  1,206
       Income taxes payable                          (190 )   (392 )    396
       Cash payments charged to shut-down and
         restructuring reserve                       (200 )   (207 )      -
                                                   ------   ------   ------
          Total adjustments                           906    6,796    1,041
                                                   ------   ------   ------
Net cash (used) provided by operating activities     (350 ) 11,033    9,173
                                                   ------   ------   ------
Cash flows from investing activities:
  Expenditures for property and equipment            (847 )   (853 ) (3,046 )
  Purchase of marketable equity and
     debt securities                                 (870 )      -        -
  Proceeds from sale of equipment                     634      498        2
  Cash paid for acquired business                       -   (1,000 )      -
  Increase in other long-term assets                    7        -        -
                                                   ------   ------   ------
Net cash (used) in investing activities            (1,076 ) (1,355 ) (3,044 )
                                                   ------   ------   ------










                            See accompanying notes.
                                      F-6
<PAGE>

                           RELIABILITY INCORPORATED
              CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
                                (In thousands)

                                                   Years Ended December 31,
                                                   ------------------------
                                                    1999     1998     1997
                                                    ----     ----     ----

Cash flows from financing activities:
  Payments on long-term debt                         (274 ) (1,687 )   (367 )
  Payment on note payable to shareholder             (534 )      -        -
  Proceeds from issuance of common and treasury
     stock pursuant to stock option and employee
     stock savings plans                              128      517      957
  Purchase of treasury stock                            -        -   (8,256 )
  Borrowings under revolving credit facility           30      457    6,969
  Payments under revolving credit facility            (30 )   (457 ) (6,969 )
  Other                                                (7 )     86      141
                                                   ------   ------   ------
Net cash (used) by financing activities              (687 ) (1,084 ) (7,525 )
                                                   ------   ------   ------
Effect of exchange rate changes on cash               (16 )      -        -
                                                   ------   ------   ------
Net (decrease) increase in cash and
  cash equivalents                                 (2,129 )  8,594   (1,396 )

Cash and cash equivalents:
  Beginning of year                                15,702    7,108    8,504
                                                   ------   ------   ------
  End of year                                     $13,573  $15,702  $ 7,108
                                                   ======   ======   ======






















                            See accompanying notes.
                                      F-7
<PAGE>
<TABLE>
                           RELIABILITY INCORPORATED
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 Years Ended December 31, 1999, 1998 and 1997
                                (In thousands)

<CAPTION>
                                                        Treasury Stock   Accumulated               Total
                                 Common Stock              (at cost)     Other Com-            Comprehensive
                                 ------------  Retained  --------------  prehensive    Total      Income
                                Shares  Amount Earnings  Shares  Amount    Income     Amount      (loss)
                                ------  ------  -------  ------  ------  -----------  ------  --------------
<S>                             <C>     <C>     <C>      <C>     <C>     <C>          <C>     <C>
Balance at December 31, 1996     4,243 $5,926   $13,742      - $     -   $     -     $19,668
  Net income                                      8,132                                8,132    $8,132
  Purchase of treasury stock                            (1,270 ) (8,256 )             (8,256 )   =====
  Treasury shares issued for
     exercise of stock options            154               23     149                   303
  Stock dividend                 2,999     30       (30 )                                  -
  Shares issued for exer-
     cise of stock options          28    130                                            130
  Treasury shares issued
     pursuant to employee
     stock savings plan                   309               33     215                   524
  Other                            141                                        141
                                 -----  -----    ------  -----  ------     -----      ------
Balance at December 31, 1997     7,270  6,690    21,844 (1,214 ) (7,892 )      -      20,642
  Net income                                      4,237                                4,237    $4,237
  Shares issued for acquisition    475  2,095                                          2,095     =====
  Shares issued for exer-
     cise of stock options          59    395                                            395
  Shares issued pursuant to
     employee stock
     savings plan                    7     40                                             40
  Treasury shares issued pur-
     suant to employee stock
     savings plan                          34                7      48                    82
  Other                                    86                                             86
                                 -----  -----    ------  -----  ------     -----      ------
Balance at December 31,1998      7,811  9,340    26,081 (1,207 ) (7,844 )      -      27,577


</TABLE>
                            See accompanying notes.
                                      F-8
<PAGE>
<TABLE>
                           RELIABILITY INCORPORATED
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)

                 Years Ended December 31, 1999, 1998 and 1997
                                (In thousands)

<CAPTION>
                                                          Treasury Stock    Accumulated            Total
                                 Common Stock                (at cost)      Other Com-         Comprehensive
                                 ------------   Retained  --------------    prehensive   Total    Income
                                Shares Amount   Earnings   Shares Amount      Income    Amount    (Loss)
                                ------ ------   --------   ------ ------   ------------  ----- ------------
<S>                             <C>    <C>      <C>        <C>    <C>      <C>           <C>   <C>
Balance at December 31, 1998     7,811 9,340     26,081   (1,207 ) (7,844 )        -   27,577
  Comprehensive income (loss):
     Net income (loss)                           (1,256 )                              (1,256 )  $(1,256 )
     Unrealized net (losses) on
      marketable equity
       securities                                                                (48 )    (48 )      (48 )
                                                                                                   -----
     Total comprehensive (loss)                                                                  $(1,304 )
  Treasury stock retirement     (1,207 ) (72 )   (7,772 )  1,207  7,844                     -      =====
  Shares issued for exer-
     cise of stock options          27   128                                              128
  Other                              1    (7 )                                             (7 )
                                 ----- -----     ------    ----- ------        -----   ------
Balance at December 31, 1999     6,632 $9,389   $17,053        - $     -      $  (48 ) $26,394
                                 ===== =====     ======    ===== ======        =====   ======














</TABLE>
                            See accompanying notes.
F-9
                           RELIABILITY INCORPORATED
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1999

1.    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      DESCRIPTION OF BUSINESS

      Reliability  Incorporated  ("Reliability"  or  the "Company") 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. In addition, a subsidiary  of the Company operates a service facility
which conditions and tests integrated  circuits  as  a  service  to others. 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. Services, as of December 31, 1999, are provided principally  to  two
customers  in Singapore. The Company, in April 1998, closed a services facility
in North Carolina  and  acquired,  in  December  1998, assets of a company that
provided  services  to customers in Austin, Texas and  Singapore.  The  Company
closed the Austin facility  in  September 1999. Another subsidiary manufactures
and sells power sources, primarily  a  line of DC to DC power converters. Power
sources are sold to U.S., European and Asian  based  companies  that design and
sell electronic equipment.

      PRINCIPLES OF CONSOLIDATION

      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.
Certain amounts in the consolidated  financial statements for the prior periods
have been reclassified to conform to the 1999 presentation.

      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.

      INVENTORIES

      Inventories,  at  December  31,  are stated at the lower of standard cost
(which approximates first-in, first-out)  or  market  (replacement  cost or net
realizable value) and include:
                                                             1999       1998
                                                             ----       ----
                                                             (In thousands)

      Raw materials                                         $  966     $1,071
      Work-in-progress                                         149        180
      Finished goods                                           501         50
                                                             -----      -----
                                                            $1,616     $1,301
                                                             =====      =====
                                     F-10
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

      Inventories  are  presented  net  of  reserves  for  excess  and obsolete
inventories  of  $428,000  and  $775,000  as  of  December  31,  1999 and 1998,
respectively.

    INVESTMENTS

    All  investments  are  classified as held to maturity or available-for-sale
securities under the provisions  of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments  in  Debt  and Equity Securities."
Management  determines  the  appropriate classification of its  investments  in
equity  and debt securities at  the  time  of  purchase  and  reevaluates  such
determinations at each balance sheet date.

    Equity  securities  are classified as available-for-sale and are carried at
their fair value on the balance sheet, with unrealized gains and losses (net of
applicable income taxes of $24,000 at December 31, 1999), if any, reported as a
separate component of stockholders'  equity.  Equity  securities  are stated at
market value, as determined by the most recently published trade price  of  the
securities  at  the balance sheet date. The debt security is classified as held
to maturity because the Company has the positive intent and ability to hold the
security to maturity.  The  security  was  converted  into  562,000  shares  of
preferred stock of the issuer in January 2000. The held to maturity security is
stated  at  amortized cost. It is not practicable to estimate the fair value of
the convertible  note,  as  the  issuer  is in the very early stages of product
development. The following table summarizes  the Company's investment in equity
securities at December 31:

                                                            1999       1998
                                                            ----       ----
                                                       (In thousands)

      Convertible bond, at amortized cost                    $500      $  -
      Marketable equity securities, at cost                   422        52
      Unrealized net (losses) on marketable
        equity securities                                     (72 )       -
                                                              ---       ---
                                                              850        52
      Amount classified as current                            203        52
                                                              ---       ---
                                                             $647      $  -
                                                              ===       ===

      PROPERTY, PLANT AND EQUIPMENT

      For financial statement purposes, depreciation is computed principally on
the straight-line method using lives of six years  for  leasehold  improvements
and 30 years for buildings, and the straight-line and double-declining  balance
methods using lives from two to eight years for machinery and equipment.

                                     F-11
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

      GOODWILL

      Goodwill  arising from the December 1998 acquisition of Basic Engineering
Services and Technology  Labs,  Inc.  ("BEST")  is amortized over its estimated
useful life of seven years.

      LONG-LIVED ASSETS

      The  Company evaluates the recoverability of  its  long-lived  assets  in
accordance  with   Statement   of   Financial   Accounting  Standards  No.  121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of". SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value  of  such  assets exceeds the
future  undiscounted  cash  flows  attributable  to  such  assets. The  Company
assesses the impairment of long-lived assets, including goodwill,  when  events
or  changes  in  circumstances indicate that the carrying value of an asset may
not be recoverable.  If  such assets are considered impaired, the impairment to
be recognized is measured  by  the  amount  by which the carrying amount of the
assets exceeds the fair value of the assets.

      STOCK OPTIONS

      The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees",  in  accounting  for  its stock
options.  Since  the  exercise price of the Company's stock options equals  the
market price of the underlying  stock  on  the  date  of  grant,  generally  no
compensation  expense is recognized. Pro forma information regarding net income
and earnings per  share,  as  calculated  under  the provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based
Compensation", is disclosed in Note 4.

      REVENUE RECOGNITION

      Generally, revenues for the sales of products and services are recognized
when products are shipped and services are provided,  unless  the  Company  has
obligations  remaining  under  the  purchase  orders, in which case, revenue is
deferred until all obligations are satisfied. Sales  returns  have historically
been immaterial.

      WARRANTY

      The  Company  warrants products sold to customers for up to  three  years
from  shipment.  A  provision   for  estimated  future  warranty  costs,  which
historically have been low, is recorded upon shipment.







                                     F-12
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

      FOREIGN CURRENCY TRANSLATION

      The financial statements of foreign subsidiaries are translated into U.S.
dollar  equivalents  in  accordance  with  Statement  of  Financial  Accounting
Standards No. 52. The Company's primary functional currency is the U.S. dollar.
Accordingly,  translation adjustments  and  transaction  gains  or  losses  for
foreign subsidiaries  that use the U.S. dollar as their functional currency are
recognized in consolidated income (loss) in the year of occurrence.

      CONCENTRATION OF RISK

      Financial  instruments   that   potentially   subject   the   Company  to
concentrations   of  credit  risk  consist  of  accounts  receivable  and  cash
equivalents.

      The Company invests in money market instruments and commercial paper with
maturities of three  months  or  less.  The  investments  are made through high
quality  financial  institutions,  and  investments  are  made  only  in  those
securities  which  have  an  investment  rating  in  the two most credit-worthy
categories.

      The  Company  sells  its  products and services to a  limited  number  of
customers (See Note 5).

      The Company's revenues are  primarily  denominated  in U.S. dollars, thus
the risks of foreign exchange fluctuations are generally not material.

      FAIR VALUE OF FINANCIAL INSTRUMENTS

      The  recorded  amounts  of  cash, accounts receivable, refundable  income
taxes, accounts payable, and accrued liabilities, as presented in the financial
statements, approximate fair value  because of the short-term maturity of these
instruments.  The  recorded  amount  of  long-term   debt,  when  present,  has
approximated  fair  value,  as  the  actual interest rate approximated  current
competitive rates. See the disclosures above for fair value information related
to investments in marketable equity and debt securities.

      EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES

      Basic earnings per share ("EPS")  excludes  dilution and is calculated by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.





                                     F-13
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

      INCOME TAXES

      Deferred income taxes are provided under the liability method and reflect
the net tax effects of temporary differences between  the  tax  basis of assets
and liabilities and their reported amounts in the financial statements.

      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 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.

2.    INCOME TAXES

      The provision for income taxes  is  based  on income (loss) before income
taxes, as follows:

      Geographic area                                1999      1998     1997
      ---------------                                ----      ----     ----
                                                          (In thousands)

      United States                                $(1,506 )  $6,018  $ 9,695
      Foreign                                         (243 )     446    2,839
      Eliminations and corporate items                 205       241     (290 )
                                                     -----     -----   ------
                                                   $(1,544 )  $6,705  $12,244
                                                    ======     =====   ======



















                                     F-14
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

      The  components  of  the  provision (benefit) for  income  taxes  are  as
follows:

                                                   Current   Deferred   Total
                                                   -------   -------- -----
      1999                                   (In thousands)
      ----
      Federal                                       $ (704 )   $ 269   $ (435 )
      Foreign                                           97        60      157
      State                                            (10 )       -      (10 )
                                                     -----     ----- -----
                                                    $ (617 )   $ 329   $ (288 )
      1998                                           =====     =====    =====
      ----
      Federal                                       $1,946     $ 154   $2,100
      Foreign                                          173       123      296
      State                                             72         -       72
                                                     -----       ---    -----
                                                    $2,191     $ 277   $2,468
      1997                                           =====       ===    =====
      ----
      Federal                                       $3,059     $  36   $3,095
      Foreign                                          586       153      739
      State                                            278         -      278
                                                     -----      ----    -----
                                                    $3,923     $ 189   $4,112
                                                     =====      ====    =====

      The differences between the effective tax rate reflected in the provision
(benefit) for income taxes on income (loss) before income taxes and the amounts
determined by applying the statutory U.S. tax rate of 34% are analyzed below:

                                                     1999      1998     1997
                                                     ----      ----     ----
                                                         (In thousands)

      Provision (benefit) at statutory rate         $ (525 )  $2,280   $4,163
      Tax effects of:
         Foreign losses for which a tax
            benefit is not available                   305       281      201
         Lower effective income tax rates related
            to undistributed foreign earnings          (49 )    (138 )   (429 )
      State income taxes                                (7 )      48      183
      Change in valuation allowance                      -         -     (168 )
      Other                                            (12 )      (3 )    162
                                                     -----     -----    -----
                                                    $ (288 )  $2,468   $4,112
                                                     =====     =====    =====


                                     F-15
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

      The change in the valuation  allowance  in 1997 resulted from the pending
expiration of related foreign tax credits. The  foreign  taxes were deducted as
expenses  prior to their expiration, resulting in a partial  realization  of  a
deferred tax asset equal to $168,000.

      The Company's  Singapore  subsidiary  had available, through December 31,
1998, an investment allowance grant which provided  a  reduction  in  Singapore
income  taxes  based  on  the  subsidiary's  investment in certain fixed assets
during the period from 1995 through 1998. The total tax benefit related to this
grant that was recorded during the four-year period ended December 31, 1998 was
approximately $290,000.

      The significant components of the Company's  net deferred tax liabilities
and assets at December 31, are as follows:

                                                                1999 1998
                                                                ---- ----
                                                               (In thousands)
      Deferred tax liabilities:
         Depreciation                                          $ 412    $ 373
         Tax on unremitted foreign earnings                      258      258
         Other                                                    48        3
                                                                ----     ----
            Total deferred tax liabilities                       718      634
                                                                ----     ----
      Deferred tax assets:
         Inventory reserves                                     (110 )   (248 )
         Accrued expenses not currently deductible              (182 )   (236 )
         Foreign net operating loss carryover                   (348 )      -
         Market value reserve - investments                      (24 )      -
         Restructuring and shut-down reserves                    (23 )    (73 )
         Other                                                   (12 )    (15 )
                                                                ----     ----
            Total deferred tax assets                           (699 )   (572 )
         Valuation allowance                                     348        -
                                                                ----     ----
      Total net deferred tax assets                             (351 )   (572 )
                                                                ----     ----
      Net deferred tax liabilities                             $ 367    $  62
                                                                ====     ====

      The  Company has established a valuation allowance  related  to  the  tax
benefits associated  with  the foreign net operating loss carryover. Management
believes that, based on a number  of  factors,  the  available evidence creates
sufficient uncertainty regarding the realization of this  foreign net operating
loss  carryover.  The  subsidiary  operates  in  Costa  Rica  under  an  export
processing tax exemption.  The subsidiary  is exempt  from Costa Rica




                                     F-16
<PAGE>

                           RELIABILITY INCORPORATED
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                               December 31, 1999


income tax through 1999 and is 50% exempted for 2000 through 2003.  At December
31,  1999,  the Costa Rica subsidiary had a net operating loss carryforward  of
approximately  $2,300,000,  expiring  in  2000  through  2002.  The  subsidiary
operated at a loss in 1999, 1998 and 1997.

      The  Company  has  provided  deferred U.S. income taxes on $3,200,000  of
undistributed  earnings  of  a  subsidiary   that  were  accumulated  prior  to
January 1, 1997. The Company has not provided  deferred  U.S.  income  taxes on
$4,200,000  of  earnings  that were accumulated after January 1, 1997 that  are
considered permanently reinvested.

      Net cash payments for  income  taxes  during  1999,  1998  and  1997 were
$132,000, $2,491,000 and $3,357,000, respectively.

3.    CREDIT AGREEMENTS, LONG-TERM DEBT AND NOTE PAYABLE TO SHAREHOLDER

    Reliability  maintains  a line of credit with Wells Fargo Bank Texas,  N.A.
which permits the Company to  borrow up to $1 million until April 1, 2001. (The
Company reduced the amount available under the line of credit from $4.0 million
to $1.0 million during the second  quarter of 1999.) Interest is payable at the
bank's prime rate minus 1/4% (8.25% at December 31, 1999). Any unpaid principal
of the note is due April 1, 2001. The  loan  agreement provides for a revolving
line of credit, secured by substantially all assets  of  the  Company which are
located  in  the  U.S.,  except  for  land  and buildings. The credit  facility
requires compliance with certain financial covenants  related  to the Company's
current ratio, debt service coverage and funded debt to net income (as defined)
and total liabilities to total net worth. The agreement prohibits  the  payment
of  cash  dividends by the Company unless otherwise agreed to by the bank.  The
Company was  in  compliance with the financial requirements of the agreement at
December 31, 1999,  and  there were no balances outstanding under the agreement
at December 31, 1999 or 1998.

      The  Company's  Singapore   subsidiary  maintains  an  agreement  with  a
Singapore bank that provides for an  overdraft  facility  of  500,000 Singapore
Dollars (U.S. $299,000 at December 31, 1999) at the bank's prime  rate  plus 2%
(7.5% at December 31, 1999). There were no balances outstanding at December 31,
1999, but amounts utilized under letter of credit commitments totaled $247,000,
resulting  in credit availability of $52,000 at December 31, 1999. The loan  is
collateralized  by  substantially  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.

      Current  maturities  on  long-term  debt  at  December  31, 1998  totaled
$274,000  and  represented  a  mortgage  payable,  due in monthly installments,
including  interest at 9%. The mortgage was paid in full  in  March  1999.  The
mortgage was collateralized by land and a building.


                                     F-17
<PAGE>

                           RELIABILITY INCORPORATED
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                               December 31, 1999

      The note  payable  to  shareholder  at  December 31, 1998 represented the
balance due to BEST related to the acquisition  of assets that was completed in
December 1998, net of certain accrued liabilities  that  the  Company agreed to
pay on behalf of BEST (See Note 10). The note was paid in full in June 1999 and
bore interest at 6%.

      Interest paid on debt during 1999, 1998, and 1997 was $18,000,  $125,000,
and $288,000, respectively.

      Interest income (expense) is presented net as follows:

                                                      1999     1998      1997
                                                      ----     ----      ----
                                                          (In thousands)

      Interest income                                $665     $ 619     $ 222
      Interest (expense)                              (16 )    (128 )    (288 )
                                                      ---      ----      ----
      Interest income (expense), net                 $649     $ 491     $ (66 )
                                                      ===      ====      ====

4.    STOCKHOLDERS' EQUITY

      STOCK OPTION PLAN

      Under  the  1997  Stock Option Plan ("Option Plan"), 1,000,000 shares  of
common stock were made available for future grants. The Option Plan permits the
granting  of  both  incentive   stock  options  and  non-qualified  options  to
directors, executive officers and  other  key  employees of the Company and its
subsidiaries. The term and vesting of each option is determined by the Board of
Directors. The term of each option 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. Incentive stock options generally vest
in three installments beginning six months after the option award.  The  second
and  third  installments  are generally on March 1, one and two years after the
initial vesting date. Non-qualified options generally vest on the date granted,
but may vest in one or more  installments.  All  option  awards  encourage  the
recipients  to  own shares of common stock by requiring optionees to own shares
of Company stock  in  order  to  avoid  the  forfeiture  of  certain  of  their
unexercised  options.  The  stock ownership inducements begin approximately two
years after the option grant  date and, in certain instances, increase in three
to five annual increments. Unexercised options terminate in installments if the
required number of shares of common  stock  is not owned on the specified date.
The number of shares available for future grant  was  94,000  at  December  31,
1999.





                                     F-18
<PAGE>

                           RELIABILITY INCORPORATED
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                               December 31, 1999

      A summary of the Option Plan activity is as follows:

                                                  Options   Weighted Average
                                                 Activity    Exercise Price
                                                  -------    ---------------

      Balance at December 31, 1996                     -         $    -
      Options granted                            424,000           5.92
      Options exercised                          (74,000 )         3.50
                                                 -------
      Balance at December 31, 1997               350,000         $ 6.43
      Options granted                            169,000          13.38
      Options exercised                          (59,000 )         3.50
      Options expired or cancelled               (28,000 )        11.09
                                                 -------
      Balance at December 31, 1998               432,000         $ 9.24
      Options granted                            366,000           3.79
      Options exercised                          (27,000 )         3.50
      Options expired or cancelled               (25,000 )         8.94
                                                 -------
      Balance at December 31, 1999               746,000         $ 6.79
                                                 =======

      The  weighted  average  fair  values of options granted in 1999, 1998 and
1997 were $2.42, $8.52 and $4.49, respectively.

      The  following  table  summarizes   information   about   stock   options
outstanding and exercisable at December 31, 1999:

                              Weighted     Outstanding            Exercisable
                             Average Re-    Weighted               Weighted
              Number of     maining Con-     Average    Number of   Average
 Exercise     Options       tractual Life   Exercise     Options   Exercise
   Price     Outstanding      in Years        Price    Exercisable   Price
 --------    -----------    -------------  ----------  ----------- ----------
  $ 2.57       172,000           9.9         $ 2.57            -    $ 2.57
    4.88       181,000           9.2           4.88      103,000      4.88
    3.50       174,000           7.2           3.50      174,000      3.50
   13.31        42,000           7.2          13.31       28,000     13.31
   13.38       147,000           8.2          13.38       49,000     13.38
   20.25        30,000           7.2          20.25       25,000     20.25
               -------                                   -------
               746,000                       $ 6.79      379,000    $ 6.98
               =======                        =====      =======     =====

      As  of December 31, 1998 and 1997, 178,000 and 135,000, respectively,  of
the outstanding  options  were exercisable at a weighted average exercise price
of $6.26 and $5.35 per share, respectively.


                                     F-19
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

      STATEMENT OF FINANCIAL ACCOUNTING STANDARDS No. 123

SFAS 123 defines a fair value  based  method  of  accounting for employee stock
options or similar equity instruments. However, SFAS  123  allows the continued
measurement  of compensation cost in the financial statements  for  such  plans
using the intrinsic  value  based  method  prescribed  by APB 25, provided that
certain pro forma disclosures are made of the net income  or loss, assuming the
fair value based method of SFAS 123 had been applied. For purposes  of  the pro
forma  disclosures presented below, the Company has computed the fair value  of
all options  granted during 1999, 1998 and 1997 using the Black-Scholes pricing
model and the following weighted average assumptions:
                                          1999       1998        1997
                                          ----       ----        ----

      Risk-free interest rate             5.41 %     5.60 %      6.48 %
      Expected lives (years)               5.0        5.0         5.3
      Expected volatility                   73 %       72 %        64 %
      Expected dividend yield                0 %        0 %         0 %

      To estimate  expected lives of options for this valuation, it was assumed
options would be exercised  at  varying  schedules after becoming fully vested.
All  options  are  initially  assumed  to vest.  Cumulative  compensation  cost
recognized in pro forma net income with  respect  to options that are forfeited
prior  to  vesting will be adjusted as a reduction of  pro  forma  compensation
expense in the period of forfeiture.

      For purposes  of  pro  forma disclosures, the estimated fair value of the
options is amortized to expense  over  the  options'  vesting  period.  If  the
Company  had  accounted for its stock-based compensation plan in 1999, 1998 and
1997 in accordance  with SFAS 123, the Company's net income (loss) and earnings
(loss) per share would have been reported as follows:

                                          1999       1998          1997
                                          ----       ----          ----
                                      (In thousands, except per share data)
      Net income (loss):
        As reported                    $(1,256 )   $4,237        $8,132
                                         =====      =====         =====
        Pro forma                      $(2,196 )   $3,667        $7,232
                                         =====      =====         =====
      Earnings (loss) per share:
        As reported - basic            $  (.19 )   $  .69        $ 1.25
                                         =====      =====         =====
        Pro forma - basic              $  (.33 )   $  .60        $ 1.11
                                         =====      =====         =====
        As reported - diluted          $  (.19 )   $  .68        $ 1.23
                                         =====      =====         =====
        Pro forma - diluted            $  (.33 )   $  .59        $ 1.09
                                         =====      =====         =====

                                     F-20
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999


      The pro forma disclosures  above  are  not  necessarily indicative of the
effects of applying SFAS 123 in future years.

      STOCK DIVIDEND

      In 1997, the Company's Board of Directors declared  a  two-for-one  stock
split  effected  as  a  100% stock dividend. The stock split was distributed in
1997. The stock split was  recorded  by  a  transfer  of  $30,000 from retained
earnings  to  common stock, representing $.01 value for each  additional  share
issued.

      TREASURY STOCK

      In March 1997, the Company purchased 1,270,221 shares of its common stock
from a stockholder  for  $6.50  per  share.  The  treasury stock was retired in
December 1999.

5.    SEGMENT INFORMATION

      The  Company's  operations consist of three segments:   (1)  the  Testing
Products segment designs,  manufactures  and  markets  equipment  used  in  the
testing and conditioning of integrated circuits by semiconductor manufacturers;
(2)  the Services segment operates services facilities which condition and test
integrated  circuits  as a service to others; and (3) the Power Sources segment
designs, manufactures and  markets  power sources, primarily a line of DC-to-DC
power converters, which convert direct  current  voltage into a higher or lower
voltage.

      The  Company  evaluates  performance  and allocates  resources  based  on
operating income, which is defined as income  before  interest income, interest
expense and income taxes.



















                                     F-21
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

      Financial information by industry segment is as follows:

                                              1999        1998        1997
                                              ----        ----        ----
                                                     (In thousands)
Revenues from external customers:
   Testing Products                         $ 4,386     $21,596     $23,464
   Services                                  10,193       9,249      20,312
   Power Sources                              1,972       2,698       3,444

Inter-segment revenues:
   Testing Products                             148         222       1,823
   Services                                      11         307         317
   Eliminations                                (159 )      (529 )    (2,140 )
                                             ------      ------      ------
                                            $16,551     $33,543     $47,220
                                             ======      ======      ======
Operating income (loss):
   Testing Products                         $(1,995 )   $ 5,589     $ 8,012
   Services                                   1,572       2,149       4,975
   Power Sources                               (611 )      (546 )      (270 )
   Provision for restructuring and
      shut-down of Services operations         (800 )      (607 )         -
   General corporate expenses                  (359 )      (371 )      (407 )
                                             ------      ------      ------
                                            $(2,193 )   $ 6,214     $12,310
                                             ======      ======      ======
Total assets:
   Testing Products                         $ 6,946     $ 6,702     $13,393
   Services                                   5,783       9,584      10,927
   Power Sources                              1,388       1,651       2,191
   General corporate assets                  14,532      15,309       3,290
                                             ------      ------      ------
                                            $28,649     $33,246     $29,801
                                             ======      ======      ======
Depreciation and amortization:
   Testing Products                         $   539     $   717     $   538
   Services (1)                               1,934       1,125         970
   Power Sources                                 65          74         105
                                             ------      ------      ------
                                            $ 2,538     $ 1,916     $ 1,613
                                             ======      ======      ======
Capital expenditures:
   Testing Products                         $   160     $   445     $   641
   Services                                     658         382       2,331
   Power Sources                                 29          26          74
                                             ------      ------      ------
                                            $   847     $   853     $ 3,046
                                             ======      ======      ======
      (1)  Includes  amortization of $164,000 and $16,000  in  1999  and  1998,
respectively.
                                     F-22
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

      General corporate  assets,  in  each  of the three years, consist of cash
investments that are not specifically identifiable  to  a  segment and, in 1999
and 1998, assets held for sale of $2,135,000 and $2,193,000, respectively.

      Financial information by geographic area is as follows:

                                              1999        1998        1997
                                              ----        ----        ----
                                                     (In thousands)
Revenues from external customers:
   United States                            $ 6,526     $22,657     $28,027
   Singapore                                  7,986       8,188      15,749
   Costa Rica                                 2,039       2,698       3,444

Inter-geographic revenues:
   United States                                148           -       1,823
   Singapore                                     11         307         317
   Eliminations                                (159 )      (307 )    (2,140 )
                                             ------      ------      ------
                                            $16,551     $33,543     $47,220
                                             ======      ======      ======
Property, plant and equipment, net:
   United States                            $ 3,483     $ 4,212     $ 6,957
   Singapore                                  3,309       4,495       2,857
   Costa Rica                                   803         829         868
                                             ------      ------      ------
                                            $ 7,595     $ 9,536     $10,682
                                             ======      ======      ======

      Revenues are attributed to geographic areas based on the  location of the
assets  producing the revenues. Inter-segment sales and inter-geographic  sales
of manufactured products are priced at cost plus a reasonable profit.

The Company  provides products and services to companies in the electronics and
semiconductor  industries,  many  of  which  are  industry leaders. There are a
limited number of companies which purchase testing  products  and services sold
by  the  Company.  The Company's four largest customers in 1999 (see  Note  11)
accounted for approximately  64%  of  consolidated revenues in 1999. These same
four customers accounted for 65% and 48%  of  consolidated revenues in 1998 and
1997,  respectively. Two other customers accounted  for  0%,  25%  and  42%  of
revenues  in  1999,  1998  and  1997,  respectively.  Accounts  receivable  are
generally  due within 30 days, and collateral is not required due to the credit
worthiness of the customers to which the Company sells.

      Accounts  receivable at any point in time are concentrated in one or more
of the Company's significant customers, depending on shipments at that point in
time to a particular  customer. Historically, the Company's bad debts have been
very low, an indication  of the credit worthiness of the customers to which the
Company sells.

                                     F-23
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999


      The Company's revenues  are  concentrated  in  the  electronics industry.
However,  the  Company's  customers operate in diverse markets  and  geographic
areas. Customers of the respective  segments  are  indicated  by  an "x" in the
table.  Revenues  from major customers, as a percent of total revenues  are  as
follows:

                               Total           Testing
                             Revenues         Products        Services
                             --------         --------        --------
      1999
      ----
      Customer A               25 %                               X
      Customer B               14                                 X
      Customer C               13                 X
      Customer D               12                 X
      Customer E                -                                 X
      Customer F                -                                 X

      1998
      ----
      Customer A                1 %                               X
      Customer B                1                                 X
      Customer C               29                 X
      Customer D               34                 X
      Customer E               21                                 X
      Customer F                4                                 X

      1997
      ----
      Customer A                - %                               X
      Customer B                -                                 X
      Customer C               19                 X
      Customer D               29                 X
      Customer E               32                                 X
      Customer F               10                                 X














                                     F-24
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

6.    EARNINGS PER SHARE

      The following  table  sets  forth  the  computation  of basic and diluted
earnings (loss) per share:
                                               1999        1998       1997
                                               ----        ----       ----
                                         (In thousands, except per share data)

Net income (loss)                            $(1,256 )    $4,237     $8,132
                                               =====       =====      =====
Weighted average shares outstanding            6,628       6,111      6,500

   Net effect of dilutive stock options
      based on the treasury stock method           -          90        104
                                               -----       -----      -----
   Weighted average shares and
      assumed conversions                      6,628       6,201      6,604
                                               =====       =====      =====
Earnings (loss) per share:
   Basic                                      $ (.19 )    $  .69     $ 1.25
                                               =====       =====      =====
   Diluted                                    $ (.19 )    $  .68     $ 1.23
                                               =====       =====      =====

      Options to purchase 632,000, 295,000 and 8,000 weighted average shares of
common  stock  of  the  Company were excluded from the computation  of  diluted
earnings  (loss)  per share  during  1999,  1998  and  1997,  respectively,  as
inclusion of these options in the calculations would have been anti-dilutive.

7.    EMPLOYEE STOCK SAVINGS PLAN

   The Company sponsors  an  Employee Stock Savings Plan (the "Plan"). The Plan
allows eligible United States  employees  to  contribute  up  to 15% of defined
compensation to the Plan and to elect to have contributions not  be  subject to
Federal  income  taxes  under Section 401(k) of the Internal Revenue Code.  The
Company matches employee  contributions  to  the Plan at a rate equal to 50% of
the employee's contribution, but the Company's matching contribution is limited
to  2%  of  the  employee's defined compensation.  The  Company  also  makes  a
voluntary contribution  of an amount equal to 1% of the defined compensation of
all participants. Effective  January  1,  1997,  the Company also contributes a
profit sharing amount based on the consolidated profits of the Company. The









                                     F-25
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

maximum  profit  sharing  contribution  is  5% of compensation.  The  Company's
contributions  for matching, voluntary and profit  sharing  contributions  were
$110,000 in 1999, $386,000 in 1998 and $501,000 in 1997. Employee contributions
are invested in  Company stock or other investment options offered by the Plan.
The Company's contributions are invested solely in Company stock, and vest with
the employee over seven years.

      The Company  has  registered  and reserved 500,000 shares of common stock
for sale to the Plan. The Plan purchased  in  the open market 94,000, 2,000 and
27,000 shares during 1999, 1998 and 1997, for an  aggregate  purchase  price of
$453,000,  $25,000  and $368,000, respectively. During 1998 and 1997, the  Plan
purchased 16,000 and 33,000 shares, respectively, of stock from the Company for
an  aggregate purchase  price  of  $122,000  and  $524,000,  respectively.  The
purchase  price  per share for stock purchased from the Company was the closing
price on the day prior  to  purchase by the Plan. At December 31, 1999, 101,000
reserved shares remain unissued under the registration statement.

8.    COMMITMENTS

      The Company leases various manufacturing and office facilities under non-
cancelable operating lease agreements,  expiring  through  2001. Rental expense
for 1999, 1998 and 1997 was $403,000, $321,000 and $273,000, respectively.

      Future minimum rental payments, net of sublease amounts,  under operating
leases  in  effect  at  December  31,  1999  are:  2000  - $280,000 and 2001  -
$119,000.

      The Company leases manufacturing and office space in its U.S. facility to
a third party under an agreement expiring in January 2001.  Rental  income  for
1999,  1998  and 1997 was $179,000, $179,000 and $180,000, respectively. Future
sublease income  under the lease will be:  2000 - $179,000; and 2001 - $15,000.
In addition, the Company entered into an agreement in October 1999 to sub-lease
the Austin, Texas  Services  facility  to a third party for a period and rental
equal to the Company's remaining obligation under the lease. Rental expense and
rental income for 1999 was $39,000 and the remaining lease obligations and sub-
lease income are:  2000 - $157,000 and 2001 - $39,000.












                                     F-26
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999


9.    ACCRUED LIABILITIES

      Accrued liabilities at December 31, consist of the following:

                                                         1999     1998
                                                         ----     ----
                                                         (In thousands)

      Payroll                                           $  685   $2,490
      Insurance payable                                     98       78
      Deferred income                                       64       18
      Warranty                                              53      148
      Other                                                129      311
                                                         -----    -----
                                                        $1,029   $3,045
                                                         =====    =====

10.   ACQUISITION

      On  December 3, 1998, the Company acquired  certain  assets  and  assumed
certain  liabilities   from  BEST.  The  assets  acquired  included  equipment,
furniture  and  fixtures,  contracts,  work-in-progress,  backlog,  proprietary
rights, books and records, customer lists and goodwill. The liabilities assumed
consisted of employee-related  obligations. The purchase price of approximately
$3.9 million consisted of (i) $1,000,000  payable  in cash, (ii) a note payable
of $790,000, and (iii) 475,000 shares of the Company's common stock. The common
stock  was  unregistered and is subject to certain transfer  restrictions.  The
operations acquired were located in Austin, Texas and Singapore and are used to
operate burn-in  and  test  services  laboratories,  providing such services to
integrated circuit manufacturers. This acquisition has been accounted for using
the  purchase  method  of  accounting.  Accordingly,  the assets  acquired  and
liabilities assumed were recorded at their estimated fair values as of the date
of acquisition. The principal assets acquired were $2.7  million  of  equipment
and goodwill. The excess of the purchase price over the net identifiable assets
acquired was $1.2 million and is being amortized over a seven-year period  on a
straight-line basis. The results of operations related to this acquisition have
been included in the Company's consolidated financial statements since December
3,  1998.  The  Austin,  Texas  facility was closed in September 1999. Impaired
goodwill was written off when the facility was closed (See Note 11).










                                     F-27
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

11.   SHUT-DOWN AND RESTRUCTURING OF FACILITIES AND ASSETS HELD FOR SALE

    The  following  table  reports  activity   in  the  accrued  shut-down  and
restructuring accounts during the years ended December 31:

                                                              1999      1998
                                                              ----      ----
                                                              (In thousands)

    Accrued costs at January 1                               $ 300     $   -

    Provision for shut-down and restructuring:
      Employee severance                                        30       207
      Excess leased facilities                                   -       200
      Other expenses                                            80       100
                                                              ----      ----
                                                               110       507
                                                              ----      ----
    Cash payments charged to accounts:
      Employee severance                                       (72 )    (207 )
      Lease payments                                          (101 )       -
      Other payments                                           (27 )       -
                                                              ----      ----
                                                              (200 )    (207 )
                                                              ----      ----
    Disposal of excess equipment                              (138 )       -
                                                              ----      ----
    Accrued costs at December 31                             $  72     $ 300
                                                              ====      ====

    The  Company's  Austin, Texas facility (which  was  part  of  the  Services
segment) provided services  principally  to  one customer and accounted for 14%
and  1%  of  the  Company's  consolidated  revenues   during   1999  and  1998,
respectively.  The  facility  was  closed  on  September  30, 1999 because  the
customer  notified  the  Company  that  it would cease sending product  to  the
facility. The Company recorded an $800,000 provision for shut-down in September
1999 related to the closing of this facility. The provision included a $875,000
write-off  of impaired goodwill and a $257,000  write-down  to  adjust  certain
fixed assets  at  the  facility  to their estimated fair value as determined by
management based on its knowledge of market conditions. Proceeds related to the
sale of certain fixed assets totaled  $442,000  and are included as a reduction
of the provision for shut-down. The provision also  included employee severance
costs  related  to 32 employees of $30,000 and $80,000  of  other  expenses  to
complete the shut-down.  A  substantial  portion  of the remaining fixed assets
related to the Austin facility were disposed of during  the  fourth  quarter of
1999.  The  Company  has  not  included  an accrual for future rent obligations
related to the leased facility in Austin because



                                     F-28
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999

it has entered into a sub-lease agreement  with  a  third  party  equal  to the
Company's  remaining  obligation  under  the  lease  agreement. It is currently
estimated that there will be no significant additional  expenses related to the
shut-down.

      Services  provided  to  Texas  Instruments  Incorporated   accounted  for
substantially all of the revenues of the Company's Singapore Services  facility
in  1998.  On October 1, 1998, Micron Technology acquired the Texas Instruments
facility in  Singapore  and  informed  the  Company  that  it would continue to
utilize the Company's burn-in services, but at a significantly  reduced  level.
Micron   accounted   for  8%  of  1999  consolidated  revenues  and  completely
discontinued utilizing  the  Company's  services  during  the fourth quarter of
1999. Texas Instruments revenues at the Singapore facility  accounted  for  21%
and  32%  of  consolidated  revenues  for the years ended December 31, 1998 and
1997, respectively. In connection with  the  decrease  in volumes, 57 Singapore
employees  were  terminated  and  a  $507,000  provision for restructuring  was
recorded  in the fourth quarter of 1998. The restructuring  provision  included
$207,000 for severance costs paid to employees who were terminated during 1998;
$200,000 related to costs associated with excess leased facilities and $100,000
related to other expenses.

      The  Company's   North   Carolina   Services   facility   accounted   for
approximately   4%   and  10%  of  consolidated  revenues  in  1998  and  1997,
respectively, and provided  services to one customer. The customer notified the
Company in January 1998 that  it  was  necessary  to reduce the output of DRAMs
burned-in  and  tested by the Company's Durham facility.  The  customer  ceased
sending product and  the  Company  shut  down  the  facility in April 1998. The
Company recorded a $100,000 impairment reserve related to the land and building
located at the Durham facility in 1998 in order to state  these  assets  at the
lower  of  carrying  amount  or  fair  value, less cost to sell. The land and a
building  located in Durham are presented  as  assets  held  for  sale  in  the
accompanying  consolidated  balance  sheet.  The assets held for sale are being
actively marketed, although no assurances can  be  given that they will be sold
during  2000.  In  connection  with the shut-down of the  facility,  46  Durham
employees were terminated. Severance  and  other related shut-down costs, which
were not material, were recorded in 1998.














                                     F-29
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1999



12.   SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

      Summarized quarterly financial data are as follows:

                              First      Second       Third      Fourth
                             Quarter     Quarter     Quarter     Quarter
                             -------     -------     -------     -------
                               (In thousands, except per share amounts)
      1999
      ----
Net sales                    $ 4,320     $ 4,961     $ 4,935     $ 2,335
Gross profit                   1,561       2,070       1,743         427
Net income (loss)               (262 )       184       (507) (1) (671  )
Earnings (loss) per share:
  Basic                         (.04 )       .03        (.08 )      (.10 )
  Diluted                       (.04 )       .03        (.08 )      (.10 )

      1998
      ----
Net sales                    $11,480     $ 9,143     $ 9,203     $ 3,717
Gross profit                   5,617       5,293       4,973       1,330
Net income (loss)              1,787  (2)  1,847       1,305        (702 ) (3)
Earnings (loss) per share:
  Basic                          .29         .30         .21        (.11 )
  Diluted                        .29         .30         .21        (.11 )

(1)   The net loss for the quarter ended September 30, 1999 includes a $800,000
      provision for shut-down of the Company's Austin, Texas Services facility.

(2)   Net  income for the quarter ended March  31,  1998  includes  a  $100,000
      impairment reserve related to assets held for sale.

(3)   The net  loss for the quarter ended December 31, 1998 includes a $507,000
      provision for restructuring of the Company's Singapore operations.












                                     F-30
<PAGE>

                           RELIABILITY INCORPORATED
         SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                 Years Ended December 31, 1999, 1998 and 1997
                                (In thousands)

                                                    1999     1998     1997
                                                    ----     ----     ----
Reserves for obsolete and excess inventory:
   Reserves at beginning of year                    $ 775    $ 871   $1,509
   Additions charged to costs and expenses            150       40      233
   Amounts charged to reserve                        (497 )   (136 )   (871 )
                                                     ----    -----    -----
   Reserves at end of year                          $ 428    $ 775   $  871
                                                     ====    =====    =====








































                                      S-1
<PAGE>

                           RELIABILITY INCORPORATED

Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure.

   Not applicable.

                                   PART III

      In accordance  with  paragraph (3) of General Instruction G to Form 10-K,
Part III of this Report is omitted  because  the  Company  will  file  with the
Securities  and  Exchange Commission, not later than 120 days after the end  of
1999, a definitive  proxy  statement  pursuant  to Regulation 14A involving the
election of directors.

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

   (a)    The following financial statements are filed as part of this report:

          1.   Consolidated Financial Statements and Supplementary Data.
               Listed in the Index to Financial Statements provided in
               response to Item 8 hereof (see p. F-1 for Index).

          2.   Financial Statement Schedule. Listed in the Index to
               Financial Statements provided in response to Item 8 hereof
               (see p. F-1 for Index).

   (b)    The following exhibits are filed as part of this report:

          3.1  Restated Articles of Incorporation (with amendment). Reference
               is made to Exhibit 3 to the Company's Quarterly Report on
               Form 10-Q for the quarter ended June 30, 1995.

          3.2  Amended and Restated Bylaws. Reference is made to Exhibit 3.2
               to the Company's Quarterly Report on Form 10-Q for the quarter
               ended September 30, 1999.

          21.  List of subsidiaries.

          23.  Consent of Independent Auditors, dated March 13, 2000, related
               to Employee Stock Savings Plan and Trust.

          23.1 Consent of Independent Auditors, dated March 13, 2000, related
               to 1997 Stock Option Plan.

          27.  Financial Data Schedule.

   (c)    No reports on Form 8-K were required to be filed by the Company
          during the last quarter of the fiscal year covered by this report.




                                      26
<PAGE>

                           RELIABILITY INCORPORATED

                                  SIGNATURES

      Pursuant to the requirements of Section 13  or  15(d)  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.

DATE:    March 15, 2000
                                   RELIABILITY INCORPORATED (Registrant)



                                   BY  /s/  Max T. Langley
                                   Max T. Langley, Senior Vice President

      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 15, 2000
                                   BY  /s/  Larry Edwards
                                   Larry Edwards, Chairman of the Board of
                                     Directors, President and
                                     Chief Executive Officer
DATE:    March 15, 2000
                                   By  /S/  Max T. Langley
                                   Max T. Langley, Senior Vice President,
                                     Chief Financial Officer
                                     Principal Accounting Officer

      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 Company
and in the capacities and on the dates indicated.

         /s/  Larry Edwards               DATE:    March 15, 2000
         Larry Edwards, Director

         /s/  W. L. Hampton               DATE:    March 15, 2000
         W. L. Hampton, Director

         /s/  John R. Howard              DATE:    March 15, 2000
         John R. Howard, Director

         /s/  Thomas L. Langford          DATE:    March 15, 2000
         Thomas L. Langford, Director

         /s/  Philip Uhrhan               DATE:    March 15, 2000
         Philip Uhrhan, Director






                                      27
<PAGE>

                           RELIABILITY INCORPORATED

                               INDEX TO EXHIBITS

Exhibit                                                              Page
Number                             Description                      Number
-------                            -----------                      ------

  21.    List of Subsidiaries.                                        29

  23.    Consent of Independent Auditors, dated March 13, 2000,
            related to Employee Stock Savings Plan and Trust.         30

  23.1   Consent of Independent Auditors, dated March 13, 2000,
            related to 1997 Stock Option Plan.                        31

  27.    Financial Data Schedule.                                     32






































                                      28