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, 1998
                         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.

      $27,275,697, based on the last  sales  price  as  reported  on The Nasdaq
Stock Market on March 5, 1999.

      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                6,631,765
            (title of class)        (number of shares outstanding)

                              as of March 5, 1999

                      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 1999 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, 1998

                                    PART I

                                                                        Page

Item 1.  Business.........................................................4
Item 2.  Properties......................................................12
Item 3.  Legal Proceedings...............................................13
Item 4.  Submission of Matters to a Vote of Security Holders.............13
Item 4A. Executive Officers of the Registrant............................13

                                    Part II

Item 5.  Market for the Registrant's Common Stock and Related
            Stockholder Matters 14
Item 6.  Selected Financial Data.........................................15
Item 7.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations..........................16
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.....................................27

                                   Part III

Item 10. Part III is omitted as the Company will file a
Item 11.    Proxy Statement for the 1999 Annual Meeting of
Item 12.    Shareholders as indicated in this report.....................27
Item 13.

                                    Part IV

Item 14. Exhibits, Financial Statement Schedules, and
            Reports on Form 8-K..........................................28
         Signatures......................................................30















                                       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.  began  operations  during  1978  and provides conditioning
services, including limited manufacturing of certain conditioning  products for
sale  to  its services customer. Reliability Singapore also manufactured  power
sources until  1993,  when  its  power  sources  manufacturing  operations were
transferred to Costa Rica. 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, as
well as 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 has manufactured equipment to
burn-in and test ICs since 1980. 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 64% of the Company's revenues in 1998.

      Since  1992,  the  Company  has  focused its research and development  on
equipment and related software that perform  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 DRAM market  and  the
CRITERIA(r) 18 line for the micrologic device market.

      Set forth below  is  the  year  of  introduction,  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       Year Intro-    Device    Power Dissi-    Primary
      Product Type            duced      Capacity      pation     Application
    ----------------       -----------   --------   ------------  -----------
     Criteria 18              1991         1,152         7KW      Micrologic
     Criteria 18-HD           1994         1,152        15KW    Microprocessors
     INTERSECT 2000 (2)       1994         8,640           -        Memory
     ---------
     (1) Power/heat dissipation rate in kilowatts
     (2) 64 Meg DRAMS

      The Company manufactures and sells CRITERIA 18 and CRITERIA  18-HD  (High
Dissipation)  burn-in  and  test  systems. The CRITERIA 18-HD system provides a
cost-effective means for functional  testing  during  burn-in of high frequency
micrologic  devices  which  dissipate  large quantities of  heat.  Solid  state
switching,  in  conjunction  with  the Reliability  logic  controller  software
system, provides an environment of very  low  AC  electrical  noise for testing
devices with .25 to .35 micron line widths. The system also offers  the ability
to  dissipate 15 KW 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 test
of high power micrologic devices.

      The Company also manufactures,  under  the  trade name INTERSECT, systems
which  functionally  test  memory  devices during burn-in.  This  represents  a
difference  in  the way memory devices  historically  have  been  tested.  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  3,072
individual DRAMs at a time, and are less expensive than serial testers, testing
costs per IC can be reduced 30% to 60%.





                                       5
<PAGE>

      The Company's first INTERSECT  system  was  introduced in 1980. 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 are based  on  the
INTERSECT 30 ("I-30")  technology  which  was  introduced  in 1992. The I-30 is
capable of functionally testing 8,640 64 Meg memory devices  during the burn-in
process in a single chamber. It is capable of testing MOS, CMOS,  Bipolar,  ECL
and  BiCMOS  DRAMs  and SRAMs. During 1994, the Company introduced a lower cost
version of the I-30 burn-in  and  test  system  called  the INTERSECT 2000 ("I-
2000"). The I-2000 has the capacity to functionally test  8,640  64  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  manufactures  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
service facility, but, since 1974, these systems and their successors have been
sold  to outside customers. Burn-in  systems  generally  are  used  on  new  IC
production  lines,  but  may  also  be  added to existing production lines. The
CRITERIA systems burn-in relatively large  numbers  of similar ICs at one time.
CRITERIA  products 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.

      The  Company  has  also designed, manufactured,  marketed  and  supported
automatic loaders and unloaders  that  transfer ICs to and from burn-in boards.
The INNOVATION(r) Loader/Unloader family  of  products  was  designed  to offer
flexibility  in  handling  surface  mount  and  dual  in-line  IC packages. The
INNOVATION product line provides automation features, such as device  and burn-
in  board handling. These features improve productivity by providing continuous
and unattended  device  loading  and unloading, allowing one operator to handle
multiple machines or operations. The  Company  has reduced the emphasis on this
product line, and, as a result, revenues during  the  1996  through 1998 period
have declined.

SERVICES ("Services").

      The Company currently operates two service facilities,  in  Austin, Texas
and in Singapore, which are dedicated to the burn-in and testing of  DRAMs. The
Services  segment  accounted  for  28%  of the Company's revenues in 1998.  The
Company closed its Durham Services facility  in  April  1998  and the principal
customer  of the Singapore Services facility was acquired by Micron  Technology
("Micron")  on  October  1,  1998.  Micron  advised  the Company, in the fourth
quarter of 1998, that it would not outsource the processing of DRAMs of its own

                                       6
<PAGE>

design. This has resulted in a significant decline in revenues at the facility,
but, in December 1998, the Company acquired a services  facility  in  Singapore
that  will  result  in an increase in revenues at the Singapore subsidiary.  On
December  3,  1998,  the  Company  acquired  assets  related  to  two  services
facilities from Basic  Engineering Services and Technology Labs, Inc. ("BEST").
The acquired facilities  are located in Austin, Texas and Singapore. (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  BEST  and  manufactured  by  other  vendors 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 one watt to thirty 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  8%  of the
Company's revenues in 1998.

      The  Company  introduced  its  initial  power sources product series, the
V-PAC(r), in 1972. The V-PAC is a DC-DC converter  compatible  with  electronic
equipment  assembly  operations.  The  Company  also manufactures the Z-PAC(r),
which is a high efficiency DC-DC power source; the  S-PAC(tm),  a  smaller  one
watt  unit  which is similar to the V-PAC; the TELECOM-PAC(r), which is a power
source designed  for  the  telecommunications  industry;  and the LAN-PAC(tm) a
power source designed to operate with Local Area Network computer applications.

      The Company introduced, in 1997, two additional models in a new series of
wide input range 30 watt DC-DC converters, which increased the number of higher
wattage units in the product line. In 1998, the Company continued 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
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)


                                       7
<PAGE>

manufacture of power sources (Power Sources). The information  included in Note
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  is  the  dominant  segment. The
following  table  sets forth the percentage of the Company's total revenues  by
business segment:

                                                     Years Ended December 31,
                                                      -----------------------
     Business Segment                                 1998     1997    1996
     ---------------- ----                            ----     ----
     Testing Products                                  64%      50%     50%
     Services                                          28       43      36
     Power Sources                                      8        7      14
                                                      ---      ---     ---
     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  1998,  Reliability focused its activities on
developing  new  features  for  existing  product  lines  that  will  meet  its
customers'  technical  requirements  for  their   next  generation  memory  and
microprocessor devices. Reliability completed development,  in  1998, and began
shipping  a  low  voltage,  high current option for its INTERSECT 2000  product
line. This new option provides customers with 40% more power and the ability to
supply and control voltages as  low  as  one volt. The Company also completed a
joint software development program with a  major customer which enhances system
software tools and improves the productivity of people who program systems.

      During  1998,  the  Company  also  concentrated   on  developing  thermal
solutions that will remove and control excess heat generated by high speed ICs.
The  Company  has  filed  certain patent applications related  to  the  thermal
solutions that have been developed by the Company.

      In 1998, the Company further expanded the use of surface mount and planar
magnetics technology in manufacturing  power  source  products and continued to
develop  and sell custom one watt through thirty watt converters  for  specific
key customers.

      (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.

                                       8
<PAGE>


      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. The Company believes that the rapidly changing
technology  in  the  electronics  industry  makes the Company's future  success
dependent more on the quality of its products,  services  and  performance, the
technical  skills  of  its personnel, and its ability to adapt to the  changing
technological environment  than  upon the protection of any proprietary rights.
The Company has patents and pending  patent  applications  in the Untied States
and  certain  other  countries  which  cover  key  components  of  testing  and
conditioning products and ancillary equipment.

      The Company considers its patents for the EX-SERT(tm) backplane system to
be  material. These patents cover the use of a cavity at the rear wall  of  the
burn-in  chamber  to  isolate  power  and  signal  connectors  from  the  harsh
environment  of  the  burn-in  chamber.  In  many burn-in systems the power and
signal connectors are subjected to intense heat  generated  within  the burn-in
chamber,  resulting  in  shortened  connector  life.  The  connection  assembly
disclosed  in  the  patents  reduces  connector equipment down time. The United
States patent was granted in 1983 and expires  in  2000,  and a Japanese patent
was  granted in 1995 and expires in 2003. The Company filed,  in  1998,  patent
applications  related to a thermally conductive mechanical device or heat sink.
The proposed thermal  solution  can  effectively remove heat from ICs, allowing
the ICs to operate at much greater speeds.

      The  Company  also  considers its patent  relating  to  a  method  of  IC
extraction during the process  of  unloading burn-in boards and a floating head
mechanism used in the loading and unloading  of  ICs  onto burn-in boards to be
significant.  These  patents  were granted in 1984 and 1988,  respectively  and
expire in 2001 and 2008, respectively.  A  patent  with respect to the floating
head mechanism was granted in Europe in 1994 and expires  in  2009, designating
France,  Germany  and  the  United Kingdom, and an application for  a  Japanese
patent with respect to such technology is pending.

      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," "ISDN-PAC," "RK-94," "SERIES 1000,"
"CRITERIA 18-HD" and others not listed  here  which  are  used less frequently.
The  Company  relies  on copyrights and trade secrets to protect  its  computer
software.

      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.

                                       9
<PAGE>

      (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  as  of  December 31,
1998.  Reference  is  made  to  Note  2 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. In 1998 and 1997, four customers accounted for 88%
and  90%,  respectively,  of  the  Company's consolidated  revenues.  The  four
customers are Intel Corporation, International  Business  Machines Corporation,
Mitsubishi Semiconductor America, Inc. and Texas Instruments  Incorporated.  In
1998,  two  of  the  customers  accounted for approximately 78% and 14%, and in
1997,  75%  and 24% of revenues, respectively,  in  the  Services  segment.  In
addition, in  1998,  two other customers accounted for 53% and 45% and in 1997,
58% and 38%, of revenues, respectively, in the Testing Products segment. Note 5
to  the  Company's  Consolidated  Financial  Statements  discloses  information
concerning customers that accounted for more than 10% of consolidated revenues.
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 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. The Company closed the Durham facility in April 1998. The facility
accounted  for  approximately 4% and 10% of Reliability's consolidated revenues
in 1998 and 1997,  respectively.  Micron Technology acquired the Singapore DRAM
operations of Texas Instruments ("TI")  in  the  fourth  quarter  of  1998.  TI
accounted  for  substantially  all  of  the revenues of the Company's Singapore
Services facility. Micron has advised the  Company that it will, in the future,
continue  to  utilize  the  Company's burn-in services,  but  at  substantially
reduced levels.

The Company acquired assets and  operations  related to two services facilities
from BEST in December 1998. The projected 1999  and  future years revenues from
the  acquired operations are forecast to offset a substantial  portion  of  the
revenue declines at the Singapore and Durham facilities (see Notes 10 and 11 of
the Company's  Consolidated  Financial  Statements  for  additional information
concerning the restructuring and closure of the Singapore and Durham facilities
and acquisition of service operations). 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 could 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                                        1998       1997
      ----------------                                        ----       ----
                                                              (In thousands)
      Testing Products                                       $1,360    $11,185
      Services                                                  182      2,260
      Power Sources                                             245        681
                                                             ------     ------
        Total                                                $1,787    $14,126
                                                             ======     ======

      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.  The Company's backlog
as  of  December  31,  1998  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  Austin,  Texas  Services   facility   provides  services  to  a  major  IC
manufacturer in Austin.

      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.

      (xi)  RESEARCH.  The  demands  of the semiconductor industry for increas-
ingly 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

                                      11
<PAGE>


lines. In 1998, 1997 and 1996, the Company spent $2.0 million, $1.6 million and
$2.2  million,  respectively, on research and development activities.  Develop-
mental projects,  which  are primarily related to the Testing Products segment,
are ongoing.

    (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, 1998, the Company had  406 employees, of
which  23 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
Costa Rica  subsidiary increased in 1998. The increase was primarily related to
a decrease in  production  levels,  resulting  in  the subsidiary needing fewer
employees.

      (d)   FINANCIAL INFORMATION ABOUT FOREIGN AND  DOMESETIC  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, as well as its manufacturing and research and
development facilities 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;  at  December  31,  1998, outstanding indebtedness secured by the
property was $274,000. The Company  occupies 96,000 square feet in the building
and leases the remaining 35,000 square feet to an outside 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  occupies 16,000 square feet of
leased space. A subsidiary of the Registrant owns a 29,500 square foot building
in the free trade zone in San Jose, Costa Rica. The  subsidiary  in  Costa Rica
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 2
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.

      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.




                                      12
<PAGE>


Item 3. Legal Proceedings.

            Not applicable.

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

            Not applicable.

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                 57        1981          Chairman of the Board
                                                          of Directors,
                                                        President and Chief
                                                         Executive Officer

Max T. Langley                52        1978          Senior Vice President,
                                                     Chief Financial Officer,
                                                      Secretary and Treasurer

James M. Harwell              44        1993              Vice President

Paul Nesrsta                  42        1993              Vice President

J.E. (Jim) Johnson            53        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. He was President and Chief Operating Officer of the Company  from 1990 to
1993  and  was  Executive  Vice  President  and Chief Operating Officer of  the
Company for more than five years prior to becoming the President in 1990.

      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.

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

                                      13
<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  under
the stock symbol  REAL.  The  high  and  low  sale prices for 1998 and 1997, as
reported by The Nasdaq Stock Market, are set forth below.

                                  First      Second       Third      Fourth
                                 Quarter     Quarter     Quarter     Quarter
                                 -------     -------     -------     -------

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

      1997
      ----
      High                       $ 4.50      $ 8.69      $23.38      $30.75
      Low                          2.94        4.06        7.56       12.25

      All  prices are restated to give effect to  the  1997  two-for-one  stock
split in the  form  of  a  dividend.  (See Note 4 to the Consolidated Financial
Statements.)

      The Company paid no cash dividends  in  1998 or 1997. 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 1998 and 1997, 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 1998 and 1997 were
registered under Registration Statements on Form S-8.

      On December 3, 1998, the Company issued  475,000  shares  of  its  Common
Stock to BEST in partial payment for assets acquired from BEST. The shares were
not registered, in reliance on Section 4 (2) of the Securities Act of 1933,  as
amended.  The  stock  was  offered  and issued in a transaction not involving a
public offering, to a single entity which  represented  that  it was taking the
shares  for  investment and not resale. The shares are legended against  resale
and cannot be  sold  for  at  least  one  year after issuance, and then only in
reliance on Rule 144 of the Securities and Exchange Commission.

      Reliability  had  approximately  767  shareholders   of   record   as  of
February   12,   1999.  Management  estimates  there  are  approximately  4,500
beneficial owners of Reliability common stock.







                                      14
<PAGE>

Item 6. Selected Financial Data.

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

                                            Years Ended December 31,
                                    -----------------------------------------
                                    1998     1997     1996     1995      1994
                                   ------   ------   ------   ------    ------
                                      (In thousands, except per share data)

Revenues                          $33,543  $47,220  $35,760  $33,930  $23,427
Cost of revenues                   16,330   23,653   18,027   16,837   12,737
                                  -------   ------   ------   ------   ------
Gross profit                       17,213   23,567   17,733   17,093   10,690

Expenses:
   Marketing, general and
      administrative                8,383    9,679    8,043    8,862    7,056
   Research and development         2,009    1,578    2,197    2,227    1,054
   Provision for restructuring        607        -        -        -        -
   Interest (income) expense net     (491 )     66       53       60     (154 )
                                   ------   ------   ------   ------   ------
      Total expenses               10,508   11,323   10,293   11,149    7,956
                                   ------   ------   ------   ------   ------
Income before income taxes          6,705   12,244    7,440    5,944    2,734
Provision for income taxes          2,468    4,112    2,594    1,881       89
                                   ------   ------   ------   ------   ------
Net income                        $ 4,237  $ 8,132  $ 4,846  $ 4,063  $ 2,645
                                   ======   ======   ======   ======   ======

Earnings per share (1):
   Diluted                        $   .68  $  1.23  $   .57  $   .48  $   .31
   Basic                              .69     1.25      .57      .48      .31

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

Total assets                      $33,246  $29,801  $26,603  $23,727  $13,284
Working capital                    15,159   11,906   12,728    8,504    8,974
Property and equipment, net         9,536   10,682    9,257    8,979    1,925
Long-term debt                          -    1,560    1,961    2,482        -
Total stockholders' equity         27,577   20,642   19,668   14,822   10,759

(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 two-for-one stock split in the form of a dividend. (See Notes  4  and 6
      of the Notes to Consolidated Financial Statements.)








                                      15
<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 liquidity during the
three year period ended December 31, 1998 are generally attributable to changes
in cash flows from operating activities, acquiring  certain  assets  from  BEST
during  1998, accelerating payments on a mortgage during 1997 and 1998, changes
in the levels  of  capital  expenditures, the purchase of 1.3 million shares of
the Company's Common Stock in  1997  and repayment, in 1997, of borrowings that
were used to partially finance the purchase  of  the Common Stock. In addition,
the shut-down of the Company's North Carolina services  facility  in  1998  and
changes  in  operations  at  the  Company's Singapore facility did, during late
1998, and will in 1999, affect the Company's future financial condition.

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

                                        1998        1997        1996
                                       ------      ------      ------
Working capital:
   Working capital (thousands)        $15,159     $11,906     $12,728
   Current ratio                     4.0 to 1    2.7 to 1    3.8 to 1
Profitability ratios:
   Gross profit                          51%        50%         50%
   Return on revenues                    13%        17%         14%
   Return on assets                      13%        27%         18%
   Return on equity                      15%        39%         25%
Equity ratios:
   Total liabilities to equity           0.2        0.4         0.4
   Assets to equity                      1.2        1.4         1.4

      The Company's financial condition  improved  significantly throughout the
three  year  period ending in 1998. Working capital totaled  $15.2  million  at
December 31, 1998,  compared to $11.9 million and $12.7 million at December 31,
1997 and 1996, respectively. The ratio of current assets to current liabilities
was 4.0 to 1 at December  31,  1998,  an increase from 2.7 to 1 and 3.8 to 1 at
December 31, 1997 and 1996, respectively.  The  Company's  current  ratios were
unusually high at  December 31, 1998 and 1996  due to cash accumulations during


                                      16
<PAGE>

periods  of  declining  production.  Assets  such  as  accounts  receivable and
inventories  decrease during periods of declining production and are  converted
to cash. 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. Cash provided by
operations in 1997 and 1996 was used to purchase capital  assets.  In addition,
in 1997, management's evaluations indicated that the Company's Common Stock was
undervalued  compared  to  industry peers. In March 1997, the Company purchased
1.3 million shares from a shareholder  for  $8.3 million. The Company used $5.8
million of its cash balance and $2.5 million  from  its  revolving term loan to
purchase the stock. The amount borrowed under the term loan  was  paid  in full
during the third quarter of 1997.

      Increased  demand  for  the  Company's  products and services during 1997
resulted  in  a $14.1 million backlog at December  31,  1997,  but  significant
decreases in demand  for  the  Company's  products  and  services  during  1998
resulted  in  backlog  decreasing  to  $1.8  million  at December 31, 1998. The
operating  effects  related  to  the changes in backlog during  1998  and  1997
affected various elements of cash  provided  by operations, as reflected in the
Consolidated Statements of Cash Flows.

      Net cash provided by operating activities for the year ended December 31,
1998 was $11.0 million, compared to $9.2 million  and  $8.9 million provided in
1997  and  1996,  respectively. 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. Significant items contributing to cash provided  by  operations  in  1997
were  the  sum of net income plus depreciation of $9.7 million and increases in
accrued liabilities,  primarily  payroll related accruals, and accounts payable
of $1.2 and $1.0 million, respectively. Cash provided by operations in 1997 was
reduced by increases in accounts receivable and inventories of $2.6 million and
$1.2 million, respectively. The changes  in  1997  were directly related to the
Company operating at levels required to support the  increase  in  revenues  in
1997, compared to 1996.

      Capital  expenditures during 1998, 1997 and 1996 were $0.9, $3.0 and $1.8
million, respectively.  Expenditures  during  1998  included  equipment for the
Testing Products segment and equipment used by the Singapore Services  facility
to provide Services to its customers. A significant portion of expenditures for
1997  included equipment required by the Singapore Services facility to support
increased  demand  for Services. A significant portion of the 1996 expenditures
included improvements  at the Services facility in North Carolina and equipment
required by the Singapore Services facility.

      During the 1996 to  1998  period,  the  Company  has  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 credit facility was $4.0 million at  December  31,  1998.  The
Company's Singapore  subsidiary maintains a small overdraft facility to support
the subsidiary's credit commitments.

                                      17
<PAGE>

      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 1996
and 1997, and modest increases in 1998. The Company's Testing  Products segment
is  dependent  on the capital expenditures by semiconductor manufacturers.  The
semiconductor industry is highly cyclical and experiences periods of oversupply
and excess production  capacity. Beginning in early 1998, oversupply and excess
production  capacity began  to  affect  demand  for  test  equipment  and  also
continued to  reduce and hold down DRAM sales prices. These factors resulted in
a significant decrease  in  the  amount  of new orders for Testing Products and
Services sold by the Company in 1998. Demand  for  Testing Products sold by the
Company remains very weak during the early months of  1999  and indications are
that the weak demand may continue for several more quarters. The acquisition of
certain Services activities from BEST in December 1998 and a  general  increase
in  demand,  in  late  1998, for Services provided by the Company indicate that
revenues in the Services  segment  could  improve throughout 1999. Based on the
Company's current low backlog level and the  uncertainty  concerning demand for
the  Company's products during 1999, Reliability is not currently  providing  a
revenue  forecast  for  the year ending December 31, 1999. The current forward-
looking forecast indicates  revenues  for  the  first  quarter  of  1999  to be
approximately  $4.3  million  to  $4.7 million, compared to fourth quarter 1998
revenues of $3.7 million.

      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 1999.

      RESULTS OF OPERATIONS.

      OVERVIEW.  Changes  in revenues from the sale of Testing Products sold by
the Company during the three  year  period  ended  in 1998 reflected changes in
demand  by  the  semiconductor  industry resulting in product  mix  and  volume
changes  in 1998 and volume increases  in  1997  and  1996.  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  increased  during 1997 and 1996
due to increased customer requirements for conditioning Services.  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  1998  and  1997.
Services revenues  in  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 3,  1998.  (See  Note  10  of  the  Company's  Consolidated  Financial
Statements for additional information.)

      REVENUES.  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, respectively.  The  factors  contributing to changes in
revenues  in  1998  are explained below.  Revenues for 1997  increased  32%  to
$47.2



                                      18
<PAGE>


million, reflecting a $5.8 million increase in the Testing Products segment and
an increase of  $7.3  million  in  the  Services segment. The revenue increases
relate  to  increased  unit demand for semiconductors,  which  translated  into
increased requirements for  products  and  services  supplied  by  the Company.
Revenues  in the Power Sources segment declined $1.6 million in 1997.  Revenues
in the Singapore  and  U.S.  geographical  segments  all increased in 1997. The
increase in the Singapore segment was attributable to a significant increase in
demand for services provided by the Singapore subsidiary.  The overall increase
in the U.S. segment was related to volume increases and product  mix changes in
the Testing Products segment.

      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  volume increases
resulting  from  an increase in the number of CRITERIA systems delivered  to  a
customer. The increase  reflected  increased  demand for semiconductors sold by
the customer. Revenues from the sale of loader  and unloader products decreased
significantly due to the Company's reduced emphasis  on the loader and unloader
products line. Revenues in the Testing Products segment  were $23.5 million for
1997,  which  was  an increase of 33% over 1996. The increase  was  related  to
increased demand resulting  in  volume  increases and higher unit prices due to
product mix changes. Revenues from the sale  of  INTERSECT  products  increased
$1.9  million, while revenues from the sale of CRITERIA and loader and unloader
products increased $3.9 million.

      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  decreased  demand  and  price
competition  and  the  acquisition by Micron of TI'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 Services segment increased 56% in 1997 to $20.3 million.
The increase was  related  to the Company's Singapore Services facility and was
caused by volume increases resulting  from  increased  demand,  reduced by unit
price  decreases  resulting  from product mix and volume changes; approximately
70% of the increase related to  an  increase  in  the sale of burn-in boards to
support product mix changes.

      Revenues  in the Power Sources segment decreased  22%  in  1998  to  $2.7
million, after decreasing  32%  to $3.4 million in 1997. Revenues were affected
in 1998 and 1997 by changes in demand, an aging product line, price competition
and a decline in market penetration resulting in volume decreases.

      COSTS AND EXPENSES.  Changes  in costs and expenses during the three year
period  were  primarily  related to changes  in  revenues  and  the  effect  of
stringent expense control programs during the period.




                                      19
<PAGE>


    Total costs and expenses,  excluding  interest and a $0.6 million provision
for restructuring, 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. Total costs and
expenses, excluding  interest,  increased $6.6 million or 24% in 1997, compared
to the 32% revenue increase of $11.5  million.  Cost of revenues increased $5.6
million; marketing, general and administrative expenses increased $1.6 million;
and research and development expenses decreased $0.6 million.

      The Company's gross profit, as a percent of revenues, was 51% in 1998 and
50% in 1997 and 1996. 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 and
1996. 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, as
discussed  above.  Gross  profit  in  the  Testing Products segment,  in  1997,
increased  slightly due to efficiencies related  to  volume  increases  and  to
product mix  changes.  The  gross profit in the Power Sources segment, in 1997,
decreased due to the significant  decrease  in  revenues  resulting from volume
decreases.  Gross  profit in the Services segment, in 1997, decreased  slightly
due to a significant  increase in revenues related to sale of burn-in boards to
Services customers. Gross  profit  on  burn-in  boards  is  traditionally lower
because of price competition. The gross profit in the Testing  Products segment
for 1996 was reduced by a $1.0 million reserve for excess inventory  due  to  a
significant decrease in demand for a specific INTERSECT model.

       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 the 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  implemented  various measures to reduce expenses.
During  1998,  worldwide personnel levels decreased  50%,  excluding  the  BEST
acquisition, through  attrition  and workforce reductions. Additional workforce
reductions,  at selected locations,  will  be  implemented  if  necessary.  The
Company will ensure  that its research and development projects and its ability
to  respond  to customer  requirements  are  not  affected  by  cost  reduction
measures. Marketing,  general  and  administrative  expenses for 1997 increased
only $1.6 million, or 20%, over the 1996 period, compared  to a 32% increase in
revenues.  This increase is primarily related to the Testing  Products  segment
and, to a lesser extent, to the Services



                                      20
<PAGE>


segment and  resulted  from  increases  in variable expenses such as royalties,
sales  commissions  and  warranty  expenses,   and  an  increase  in  incentive
compensation  accruals  which  are  directly  related   to   an   increase   in
profitability.

      Research  and  development expenses increased $0.4 million in 1998, after
declining $0.6 million  in  1997.  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  accounted for a substantial portion of the
revenues in the three year period ending  in 1998. The Company classifies costs
related  to  modifying  existing  products as sustaining  engineering  expense.
Sustaining engineering expenses are  charged  to cost of product sales and thus
are  not  included in research and development expense.  In  1997,  substantial
engineering   resources   were  devoted  to  sustaining  engineering  projects.
Sustaining engineering expenses increased $650,000 or 250% in 1997, compared to
1996.  Reliability  is committed  to  continuing  a  significant  research  and
development program, and development costs may increase in 1999.

      PROVISION FOR RESTRUCTURING AND IMPAIRMENT AND ASSETS HELD FOR SALE.  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 that
will be processed by the  Company  in Singapore. The volume decrease relates to
the  fact  that  Micron  Technology  acquired   the   Texas   Instruments  DRAM
manufacturing  facility  in  Singapore.  The  restructuring provision  includes
$207,000 for severance costs paid to employees that were terminated during 1998
and current estimates of other costs that will be incurred in restructuring the
operations. The Company, in 1998, acquired certain  operations  related to BEST
Singapore and will, in 1999, integrate the operations of Reliability  Singapore
with those of BEST Singapore. Additional restructuring costs may be incurred in
1999  related  to  combining the activities of the two operations. 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  $2.2 million and the assets are classified  as assets held for
sale in the December 31, 1998 consolidated balance sheet. The  assets are being
actively marketed, although no assurances can be given that they  will  be sold
during 1999.

      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 significant increases in
investable cash and interest expense decreased  due  to  the  fact  the Company
accelerated payments on the mortgage related to the Houston facility.

      PROVISION FOR INCOME TAXES.  The Company's effective tax rates  were 37%,
34%  and  35%  for  1998,  1997  and  1996,  respectively.  The principal items
affecting the Company's tax rate in 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 state income taxes and, in 1997, a change in
the valuation  allowance  resulting  from  utilization  of foreign tax credits.
Effective  January  1,  1997, the Company changed its policy  with  respect  to
providing  U.S.  income  taxes  on  undistributed  earnings  of  its  Singapore
subsidiary. Changes in demand for services provided by the subsidiary

                                      21
<PAGE>


necessitates permanent reinvestment  of future earnings of the subsidiary; thus
deferred U.S. income taxes have not been  provided  after  January 1, 1997. The
effective  tax  rate  in  1996  was  affected by a tax benefit from  an  export
processing exemption in Costa Rica and state income tax expense.

      NET  INCOME.  Income before income  taxes  was  $6.7  million  for  1998,
compared to  $12.2  million  for 1997 and $7.4 million for 1996. Net income was
$4.2 million, $8.1 million and $4.8 million for the respective periods.

      EARNINGS PER SHARE.  Diluted earnings per share were $.68, $1.23 and $.57
for the years ended December 31, 1998, 1997 and 1996, respectively; $.04 of the
1998 earnings per share was due to a decrease in the weighted average number of
shares outstanding and $.29 of  the  1997 increase was due to a decrease in the
weighted average number of shares outstanding.  The  decrease, in 1997 and to a
lesser degree in 1998, in average shares outstanding resulted  from 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 have been
restated to reflect the stock split.

      IMPACT  OF  YEAR  2000.  The Year 2000 Issue is the  result  of  computer
programs  being written using  two  digits  rather  than  four  to  define  the
applicable  year.  Any  of  the  Company's  computer  programs  that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruption of normal business activities.

      Based on a recent and ongoing assessment, the Company determined  that it
would  be  required  to modify or replace portions of its software and software
that has been sold to customers so that computer systems will function properly
with respect to dates in the year 2000 and thereafter. A substantial portion of
the modifications and  replacements had been completed as of December 31, 1998.
The  Company  presently  believes  that  with  modifications  to  software  and
conversions to new software  that  have  been  or will be implemented, the Year
2000  Issue  will  not  pose  significant operational  problems  and  will  not
materially affect future financial results.

      The Company anticipates completing  substantially  all known Company year
2000 compliance projects by March 31, 1999. Readiness and  compliance  by third
parties  will  be  monitored  throughout  1999.  The  overall  program has been
classified into four projects:

      1.    assessment   of  products  that  are  currently  manufactured   and
            supported by the Company;
      2.    assessment  of   the  Company's  internal  business  and  operating
            systems;
      3.    assessment of the  impact on the Company of non-compliance by third
            party companies that  supply  material  and services to the Company
            and  obtaining  confirmation that the third  parties  will  correct
            known non-compliance in a timely manner; and
      4.    conversion of BEST  internal  business and operating systems to the
            Company's compliant systems.

      It is currently estimated that the total  cost  associated  with the year
2000 compliance project will not exceed $200,000. Approximately 80% of the cost
has already been incurred.
                                      22
<PAGE>


      The following is the current status of the four projects:

      1.    Evaluation  of the year 2000 impact on products that are  currently
            sold and supported  by  the  Company is substantially complete. The
            Company has provided year 2000  solutions to customers of currently
            supported  products.  It is estimated  that  the  Company  and  its
            customers have completed  approximated  80%  of the testing of year
            2000 solutions related to Company supported products.  The  Company
            does  not  provide  year  2000  solutions  for products that are no
            longer in production. The Company will quote  to customers the cost
            to provide year 2000 solutions for products that  are  no longer in
            production. It is projected that there will be a limited  number of
            requests  for  year  2000  solutions related to items that are  not
            current products. The Company believes that products that are being
            shipped currently and that will  be  shipped in the future are year
            2000 compliant. The Company's year 2000  solutions  are  subject to
            typical  uncertainties,  such as future identification of currently
            unknown  problems  and that  products  will  only  be  used  for  a
            reasonable number of  years  related  to  the  technology  that the
            product is designed to process.

      2.    Internal  business  and  operating systems located at the Company's
            three facilities have been  evaluated  and  necessary  hardware and
            software changes have been identified.

            (a)  The  Houston  conversion  is  approximately  95% complete  and
            additional  testing  is  the  principal  item  that remains  to  be
            completed.

            (b) The Costa Rica conversion is approximately 95%  complete. It is
            estimated that the conversion will be completed by March 31, 1999.

            (c) The Singapore conversion is approximately 80% complete  and  it
            is  projected that the conversion will be substantially complete by
            May 31, 1999.

      3.    The Company has communicated with key third party suppliers and has
            received responses from approximately 80% of the suppliers.

            (a) This  project  is  estimated  to  be  only 50% complete because
            certain  suppliers  have  indicated  that compliance  will  not  be
            completed until various times in 1999.

            (b) The major item remaining to be completed  is  to follow up with
            suppliers  that  have  not  responded  or  that  are not year  2000
            compliant.

            (c)  The  status  of  this  project  will be updated quarterly  and
            specific action steps will be determined  each quarter. The Company
            and the public in general will be subject to  uncertainties related
            to continuation of public utility services, availability  of  major
            freight   carriers   and  availability  of  services  from  similar
            suppliers. The Company  will  attempt  to  obtain written assurance
            from as many key  suppliers as  possible and will, throughout 1999,
                                      23
<PAGE>


            identify problem areas and develop and implement contingency plans,
            if necessary.

      4.    Substantially  all  of  the BEST systems will be  converted  and/or
            integrated into the Company's  compliant systems by March 31, 1999.
            The remaining systems will be converted by June 30, 1999.

      The Company has not completed development  of  contingency  plans  or its
evaluation of the possible worst case scenario. In general, it appears that the
worst  case  scenario  may  be  that  some  suppliers may not be able to supply
critical  products  or  services.  The  Company will  seek  new  vendors  where
necessary. The development of the worst case  scenario and contingency plans is
expected to be completed by June 30, 1999.

      The Company's year 2000 compliance project  is being implemented based on
information  that  is  generally  available  concerning  identified  year  2000
problems. Additional information is continually  emerging  concerning year 2000
problems and solutions, and the Company believes it is using reasonable efforts
to  assess  and correct year 2000 problems and will, as necessary,  update  the
assessment.

      The costs  of  the  project and the date by which the Company believes it
will complete year 2000 modifications are based on management's best estimates,
which were derived utilizing  numerous  assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could materially differ from those anticipated.

                        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 develop-
ments, 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 Company
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.



                                      24
<PAGE>


      The Company  is exposed to market risks, including interest rate 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,  1998,  the  Company  had
short-term  investments  totaling  $14 million. Due to the short-term nature of
these  instruments,  the carrying value  approximates  market  value.  If  1999
average short-term interest  rates  decreased  by 1.0% over 1998 average rates,
the  Company's  projected  interest  income from short-term  investments  would
decrease by approximately $140,000.

      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. This debt is expected to be paid  in  full  during
the  first  half  of 1999. Market risk, estimated as potential increase in fair
value resulting from  a  hypothetical  1.0%  decrease  in  interest  rates,  is
estimated  to  be  not  material  to  the  Company  as of December 31, 1998. In
addition to this debt, 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. There
were  no  borrowings   outstanding   under   these   lines   of  credit  as  of
December 31, 1998.

      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 60% and 50% of  its  Singapore
subsidiary's 1999 revenues  and  expenses, respectively, will be denominated in
Singapore  dollars.  The  balance  will   be   denominated   in  U.S.  dollars.
Historically, fluctuations in 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.






                                      25


      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  1998,  the Company's
four   largest  customers  accounted  for  approximately  88%  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.














































                                      26
<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, 1998 and 1997                 F-3
For each of the three years in the period ended December 31, 1998:
   Consolidated statements of income                                      F-5
   Consolidated statements of cash flows                                  F-6
   Consolidated statements of stockholders' equity                        F-8
Notes to consolidated financial statements                                F-9
Schedule for each of the three years in the period
      ended December 31, 1998:
   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, 1998 and 1997, and the related
consolidated statements of income, cash flows and stockholders' equity for each
of  the three years in the period ended December  31,  1998.  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 generally  accepted  auditing
standards. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period  ended   December  31,  1998,  in  conformity  with  generally  accepted
accounting principles.  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 29, 1999













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

                                    ASSETS


                                                            December 31,
                                                           --------------
                                                            1998     1997
Current assets:                                             ----     ----
  Cash and cash equivalents                               $15,702  $ 7,108
  Accounts receivable                                       2,178    6,753
  Inventories                                               1,301    4,156
  Deferred tax assets                                         572      601
  Other current assets                                        441      501
                                                           ------   ------
     Total current assets                                  20,194   19,119

Property, plant and equipment, at cost:
  Machinery and equipment                                  14,390   16,279
  Building and improvements                                 5,023    7,958
  Land                                                        530      792
                                                           ------   ------
                                                           19,943   25,029
     Less accumulated depreciation                         10,407   14,347
                                                           ------   ------
                                                            9,536   10,682

Assets held for sale                                        2,193        -
Goodwill, net of accumulated amortization                   1,323        -
                                                           ------   ------
                                                          $33,246  $29,801
                                                           ======   ======






















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


                     LIABILITIES AND STOCKHOLDERS' EQUITY



                                                            December 31,
                                                           --------------
                                                            1998     1997
                                                            ----     ----
Current liabilities:
  Current maturities on long-term debt                    $   274  $   401
  Note payable to shareholder                                 534        -
  Accounts payable                                            547    1,659
  Accrued liabilities                                       3,045    4,426
  Income taxes payable                                        335      727
  Accrued restructuring costs                                 300        -
                                                           ------   ------
     Total current liabilities                              5,035    7,213

Long-term debt                                                  -    1,560
Deferred tax liabilities                                      634      386
Commitments and contingencies                                   -        -

Stockholders' equity:
  Common stock, without par value; 20,000,000 shares
     authorized; 7,811,278 and 7,269,502 shares issued
     in 1998 and 1997, respectively                         9,340    6,690
  Retained earnings                                        26,081   21,844
                                                           ------   ------
                                                           35,421   28,534
  Less treasury stock, at cost, 1,206,762 and
     1,214,211 shares in 1998 and 1997, respectively        7,844    7,892
                                                           ------   ------
     Total stockholders' equity                            27,577   20,642
                                                           ------   ------
                                                          $33,246  $29,801
                                                           ======   ======
















                            See accompanying notes.
                                       F-4
<PAGE>

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


                                                  Years Ended December 31,
                                                  ------------------------
                                                   1998      1997    1996
                                                   ----      ----    ----
Revenues:
  Product sales                                  $24,294   $26,908 $22,770
  Services                                         9,249    20,312  12,990
                                                  ------    ------  ------
                                                  33,543    47,220  35,760
Costs and expenses:
  Cost of product sales                           10,491    11,108  10,132
  Cost of services                                 5,839    12,545   7,895
  Marketing, general and administrative            8,383     9,679   8,043
  Research and development                         2,009     1,578   2,197
  Provision for restructuring                        607         -       -
                                                  ------    ------  ------
                                                  27,329    34,910  28,267
                                                  ------    ------  ------
Operating income                                   6,214    12,310   7,493
Interest income (expense), net                       491       (66 )   (53 )
                                                  ------    ------  ------
Income before income taxes                         6,705    12,244   7,440
Provision for income taxes                         2,468     4,112   2,594
                                                  ------    ------  ------
Net income                                       $ 4,237   $ 8,132 $ 4,846
                                                  ======    ======  ======
Earnings per share:
  Diluted                                        $   .68   $  1.23 $   .57

  Basic                                          $   .69   $  1.25 $   .57

Weighted average shares:
  Diluted                                          6,201     6,604   8,486

  Basic                                            6,111     6,500   8,486














                            See accompanying notes.
                                      F-5
<PAGE>

                           RELIABILITY INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)


                                                   Years Ended December 31,
                                                   ------------------------
                                                    1998     1997     1996
                                                    ----     ----     ----
Cash flows from operating activities:
  Net income                                       $4,237  $ 8,132  $ 4,846
  Adjustments to reconcile net income to cash
     provided by operating activities:
       Depreciation and amortization                1,916    1,613    1,438
       Change in deferred tax assets
         and liabilities                              277      189     (105 )
       Provision for inventory obsolescence            40      233    1,043
       Provision for restructuring, net of
         cash payments                                400        -        -
       Loss (gain) on disposal of fixed assets        (14 )      6      (47 )
  Increase (decrease) in operating assets and
     liabilities, net of effects from acquisition:
       Accounts receivable                          4,575   (2,565 )  4,301
       Inventories                                  2,815   (1,230 )   (284 )
       Prepaid income taxes                             -      286     (286 )
       Other current assets                           (72 )    (52 )   (138 )
       Accounts payable                            (1,112 )    959     (675 )
       Accrued liabilities                         (1,637 )  1,206     (870 )
       Income taxes payable                          (392 )    396     (355 )
                                                   ------   ------   ------
          Total adjustments                         6,796    1,041    4,022
                                                   ------   ------   ------
Net cash provided by operating activities          11,033    9,173    8,868
                                                   ------   ------   ------
Cash flows from investing activities:
  Cash paid for acquired business                  (1,000 )      -        -
  Expenditures for property and equipment            (853 ) (3,046 ) (1,754 )
  Proceeds from sale of equipment                     498        2       85
                                                   ------   ------   ------
Net cash (used) in investing activities            (1,355 ) (3,044 ) (1,669 )
                                                   ------   ------   ------













                            See accompanying notes.
                                      F-6
<PAGE>

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

                                                   Years Ended December 31,
                                                   ------------------------
                                                    1998     1997     1996
                                                    ----     ----     ----

Cash flows from financing activities:
  Payments on long-term debt                       (1,687 )   (367 )   (247 )
  Proceeds from issuance of common and treasury
     stock pursuant to stock option and employee
     stock savings plans                              517      957        -
  Purchase of treasury stock                            -   (8,256 )      -
  Borrowings under revolving credit facility          457    6,969        -
  Payments under revolving credit facility           (457 ) (6,969 )      -
  Other                                                86      141        -
                                                   ------   ------   ------
Net cash (used) by financing activities            (1,084 ) (7,525 )   (247 )
                                                   ------   ------   ------

Net increase (decrease) in cash and
  cash equivalents                                  8,594   (1,396 )  6,952

Cash and cash equivalents:
  Beginning of year                                 7,108    8,504    1,552
                                                   ------   ------   ------
  End of year                                     $15,702  $ 7,108  $ 8,504
                                                   ======   ======   ======
























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

                 Years Ended December 31, 1998, 1997 and 1996
                                (In thousands)

                                                    Treasury Stock
                           Common Stock                (at cost)
                           ------------   Retained  --------------   Total
                          Shares  Amount  Earnings   Shares Amount Amount
                          ------  ------  --------   ------ ------ ------
Balance at
  December 31, 1995        4,243  $5,926   $ 8,896       - $     - $14,822
Net income                                   4,846                   4,846
                           -----   -----    ------   -----  -----   ------
Balance at
  December 31, 1996        4,243   5,926    13,742       -      -   19,668
  Net income                                 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
  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
     pursuant 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
                           =====   =====    ======   ===== ======   ======






                            See accompanying notes.
                                      F-8
<PAGE>

                           RELIABILITY INCORPORATED
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1998

1.    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      DESCRIPTION OF BUSINESS

      Reliability  Incorporated  is  a  United States  based  corporation  with
operations in the United States, Singapore  and Costa Rica. The Company and its
subsidiaries are principally engaged in the design,  manufacture  and  sale  of
equipment  used  to  test  and  condition integrated circuits. In addition, the
Company  and  a  subsidiary of the Company  operate  service  facilities  which
condition and test  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  the  Pacific Rim.
Services,  as  of December 31, 1998, are provided principally to two customers,
one in the U.S.  and  one  in  Singapore.  The  Company  closed a U.S. services
facility in April 1998 and acquired, in December 1998, assets of a company that
provides  services  to  customers  in  Austin,  Texas  and  Singapore.  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.

      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:
                                                             1998       1997
                                                             ----       ----
                                                             (In thousands)

      Raw materials                                         $1,071     $1,611
      Work-in-progress                                         180      2,189
      Finished goods                                            50        356
                                                             -----      -----
                                                            $1,301     $4,156
                                                             =====      =====
      Inventories  are  presented  net  of  reserves  for  excess  and obsolete
inventories  of  $775,000  and  $871,000  as  of  December  31,  1998 and 1997,
respectively.
                                      F-9
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998

      PROPERTY, PLANT AND EQUIPMENT

      For financial statement purposes, depreciation is computed principally on
the straight-line method using lives of 6 years for leasehold improvements  and
30  years  for  buildings,  and  the straight-line and double-declining balance
methods using lives from 2 to 8 years for machinery and equipment.

      GOODWILL

      Goodwill arising from the acquisition  of  Basic Engineering Services and
Technology Labs, Inc. ("BEST") is amortized over its  estimated  useful life of
seven years. Accumulated amortization was approximately $16,000 at December 31,
1998.

      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  when  events  or  changes  in  circumstances
indicate that  the  carrying  value  of  an  asset  may not be recoverable. The
Company assesses impairment of goodwill in a similar manner.

      STOCK OPTIONS

      In 1997, the Company adopted Statement of Financial  Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation".  As  permitted
under  this  standard,  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 SFAS 123,
are 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.





                                     F-10
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998

      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.

      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 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 primarily 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 rating
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, 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 approximates  fair  value, as the actual interest rate
approximates current competitive rates.











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

                               December 31, 1998

      EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES

      In  February  1997,  the  Financial  Accounting  Standards  Board  issued
Statement  of Financial Accounting Standards  No.  128,  "Earnings  per  Share"
("SFAS 128"),  which  specifies  the  computation,  presentation and disclosure
requirements for earnings per share ("EPS"). SFAS 128 replaced the presentation
of  primary  and  fully  diluted  EPS pursuant to Accounting  Principles  Board
Opinion  No. 15, "Earnings Per Share",  with  the  presentation  of  basic  and
diluted EPS.  Basic  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. The Company adopted SFAS 128 in the quarter ended December
31, 1997 and has,  as  required by the statement, restated all prior period EPS
data.

      INCOME TAXES

      The Company provides  for  income taxes under the provisions of Statement
of Financial Accounting Standards 109. 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.

      COMPREHENSIVE INCOME

      As  of  January  1,  1998, the Company  adopted  Statement  of  Financial
Accounting Standards No. 130,  "Reporting  Comprehensive  Income" ("SFAS 130").
SFAS  130  establishes  new  rules  for reporting and display of  comprehensive
income and certain components of comprehensive  income which are referred to as
"Other Comprehensive Income". The Company does not  have  any  items  of  Other
Comprehensive  Income;  thus  the adoption of SFAS No. 130 had no impact on the
Company's  net  income  or  stockholders'   equity.   During  the  years  ended
December  31,  1998,  1997  and 1996, total comprehensive income  amounts  were
$4,237,000 $8,132,000 and $4,846,000,  respectively,  which are the same as net
income.






                                     F-12
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998


2.    LONG-TERM DEBT AND NOTE PAYABLE TO SHAREHOLDER

      Reliability maintains a loan agreement with Wells  Fargo Bank Texas, N.A.
which permits the Company to borrow up to $4 million until  December  31, 1999.
Interest  is payable at the bank's prime rate minus 1/4% (7.5% at December  31,
1998). The  unpaid  principal  of  the  note is due December 31, 1999. 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 loan
covenants related  to  the  Company's  current ratio, debt service coverage and
funded debt to net income before income  taxes plus non-cash items and interest
expense. 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  at  December  31,  1998, and there  were  no  balances
outstanding under the agreement at December 31, 1998 or 1997.

      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. $303,000  at  December 31, 1998) at the bank's prime rate plus 1%
(9.5% at December 31, 1998). There were no balances outstanding at December 31,
1998, but amounts utilized under letter of credit commitments totaled $198,000,
resulting in credit availability  of $105,000 at December 31, 1998. 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.

      Long-term debt at December 31, consisted of the following:

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

      Mortgage payable; due in monthly installments of
         $26,777 ($196,777 as explained below), including
         interest at 9%                                       $274   $1,961
      Revolving line of credit (described above)                 -        -
                                                               ---    -----
                                                               274    1,961
      Less current maturities                                  274      401
                                                               ---    -----
         Long-term debt due after one year                    $-0-   $1,560
                                                               ===    =====





                                     F-13
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998

      The  mortgage  was  payable  in 180 equal monthly installments, including
interest at 9%. The Company began paying  an  additional  principal  payment of
$20,000  each month in 1997 and $170,000 each month in 1998. Current maturities
as of December  31, 1998 assume the Company will continue making the additional
$170,000 principal  payment,  resulting  in  the mortgage being paid in full on
March 1, 1999. The mortgage is collateralized by land and a building.

      Interest paid on debt during 1998, 1997  and  1996 was $125,000, $288,000
and $224,000, respectively.

      Interest income (expense) is presented net as follows:

                                                    1998      1997      1996
                                                    ----      ----      ----
                                                         (In thousands)

      Interest income                               $ 619      $222     $ 176
      Interest (expense)                             (128 )    (288 )    (229 )
                                                     ----      ----      ----
      Interest income (expense), net                $ 491      $(66 )   $ (53 )
                                                     ====      ====      ====

      The  note  payable  to shareholder at December 31,  1998  represents  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 is due June  3,  1999  and  bears
interest at 6%.

3.    INCOME TAXES

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

      Geographic area                                1998      1997     1996
      ---------------                                ----      ----     ----
                                                          (In thousands)

      United States                                 $6,018   $ 9,695   $5,925
      Foreign                                          446     2,839    1,533
      Eliminations and corporate items                 241      (290 )    (18 )
                                                     -----    ------    -----
                                                    $6,705   $12,244   $7,440
                                                     =====    ======    =====






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

                               December 31, 1998

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

                                                   Current   Deferred   Total
                                                   -------   -------- -----
      1998                                                (In thousands)
      ----
      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
                                                     =====      ====    =====
      1996
      ----
      Federal                                       $2,238     $(133 ) $2,105
      Foreign                                          275        28      303
      State                                            186         -      186
                                                     -----      ----    -----
                                                    $2,699     $(105 ) $2,594
                                                     =====      ====    =====

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

                                                     1998      1997     1996
                                                     ----      ----     ----
                                                         (In thousands)

      Provision at statutory rate                   $2,280    $4,163   $2,530
      State income taxes                                48       183      123
      Tax effects of:
         Lower effective income tax rates related to
            undistributed foreign earnings            (138 )    (429 )      -
         Foreign losses for which a tax benefit is
            not available                              281       201        -
         Foreign tax benefit of export processing
            exemption                                    -         -      (63 )
      Change in valuation allowance                      -      (168 )      -
      Other                                             (3 )     162        4
                                                     -----     -----    -----
                                                    $2,468    $4,112   $2,594
                                                     =====     =====    =====
                                     F-15
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998


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

                                                                1998 1997
                                                                ---- ----
                                                               (In thousands)
      Deferred tax liabilities:
         Depreciation                                          $ 507    $ 333
         Other                                                   127       53
                                                                ----     ----
            Total deferred tax liabilities                       634      386
                                                                ----     ----
      Deferred tax assets:
         Inventory reserves                                     (248 )   (296 )
         Accrued expenses not currently deductible              (236 )   (301 )
         Restructuring reserve                                   (73 )      -
         Other                                                   (15 )     (4 )
                                                                ----     ----
            Total deferred tax assets                           (572 )   (601 )
                                                                ----    -----
      Net deferred tax liability (asset)                       $  62    $(215 )
                                                                ====     ====

      A valuation allowance was provided in 1996 since realization of a portion
of  the  deferred  tax  assets  was  uncertain.  The reduction in the valuation
allowance in 1997 resulted from the pending expiration  of  the related foreign
tax  credits.  These  foreign  taxes were deducted as expenses prior  to  their
expiration, resulting in a partial  realization of the deferred tax asset equal
to $168,000.

      The Company's Singapore subsidiary  had available 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 is approximately $290,000.

      Effective  January  1997,  the Company changed its policy with respect to
providing U.S. income taxes on undistributed  earnings of a foreign subsidiary.
Changes  in  demand  for  services  provided  by  the  subsidiary  necessitates
permanently reinvesting future earnings of the subsidiary. Deferred U.S. income
taxes have not been provided on $3,700,000 of earnings  that  were  accumulated
after  January 1, 1997. Earnings prior to January 1, 1997, on which U.S.  taxes
have been provided, total $3,200,000.






                                     F-16
<PAGE>

                           RELIABILITY INCORPORATED
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                               December 31, 1998

      Net  income  for  1996 included income of a subsidiary operating in Costa
Rica under an export processing  tax  exemption.  The subsidiary is exempt from
Costa Rica income tax through 1999 and is 50% exempted for 2000 through 2003. A
tax benefit of $63,000 was recorded in 1996 related to income of the subsidiary
in 1996. The subsidiary operated at a loss in 1998 and 1997.

      Net  cash  payments  for income taxes during 1998,  1997  and  1996  were
$2,491,000, $3,357,000 and $3,351,000, respectively.

4.    STOCKHOLDERS' EQUITY

      STOCK DIVIDEND

      On September 5, 1997,  the  Company's  Board of Directors declared a two-
for-one  stock split effected as a 100% stock dividend  to  be  distributed  on
October 6,  1997,  to  shareholders  of record on September 22, 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.  Weighted
average share and per share data, stock option  information  and employee stock
savings  plan  information  have  been  restated  to  reflect the stock  split.
Treasury stock information has not been restated because the stock split in the
form of a dividend did not apply to treasury stock.

      TREASURY STOCK

      In March 1997, the Company purchased 1,270,221 shares of its common stock
from a stockholder for $6.50 per share. Treasury stock  may  be  used  to issue
shares  under  the  Company's 1997 Stock Option Plan ("Option Plan") or may  be
used to fund the Company's contributions to its employee stock savings plan.

      STOCK OPTIONS

      In February 1997,  the Company's Board of Directors adopted, and in April
1997 the shareholders approved,  the  Option Plan, under which 1,000,000 shares
of common stock were made available for  future grants. The Option Plan permits
the granting of both incentive stock options,  as  defined  under  the Internal
Revenue  Code,  and non-qualified options to directors, executive officers  and
other key employees  of  the Company and its subsidiaries. The term 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 equal installments
beginning six months after the option  award. The second and third installments
are on March 1, one and two years after the initial vesting date. Non-qualified
options vest on the date granted. 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


                                     F-17
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998

certain  of  their  unexercised options. The stock ownership inducements  begin
approximately two years  after  the  option grant date and 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 435,000 at December 31,
1998.

      A summary of the Option Plan activity for the years ended December 31, is
as follows:
                                                            Weighted Average
                                                  Options    Exercise Price
      1997                                        -------    ---------------
      ----
      Outstanding at beginning of year                 -          $   -
      Granted                                    424,000           5.92
      Exercised                                  (74,000 )         3.50
                                                 -------
      Outstanding at end of year                 350,000          $6.43
                                                 =======           ====
      Weighted average fair value of
        options granted                                           $4.49
                                                                   ====

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


      1998
      ----
      Outstanding at beginning of year           350,000         $ 6.43
      Granted                                    169,000          13.38
      Exercised                                  (59,000 )         3.50
      Expired or cancelled                       (28,000 )        11.09
                                                 -------
      Outstanding at end of year                 432,000         $ 9.24
                                                 =======           ====
      Weighted average fair value of
        options granted                                          $ 8.52
                                                                   ====











                                     F-18
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998

      The  following  table   summarizes   information   about   stock  options
outstanding and exercisable at December 31, 1998:

                              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
 --------    -----------    -------------  ----------  ----------- ----------
  $ 3.50       201,000           8.2         $ 3.50      142,000    $ 3.50
   13.31        48,000           8.2          13.31       16,000     13.31
   13.38       153,000           9.2          13.38            -     13.38
   20.25        30,000           8.2          20.25       20,000     20.25
               -------                                   -------
               432,000                       $ 9.24      178,000    $ 6.26
               =======                        =====      =======     =====


      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 1998 and 1997 using the Black-Scholes pricing  model
and the following weighted average assumptions:

                                                     1998          1997
                                                     ----          ----

      Risk-free interest rate                       5.60%          6.48 %
      Expected lives                               5.0 years    5.3 years
      Expected volatility                             72%            64 %
      Expected dividend yield                          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.







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

                               December 31, 1998

      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 1998 and 1997 in
accordance with SFAS 123, the Company's net income and earnings per share would
have been reported as follows (in thousands, except per share data):

                                                     1998          1997
                                                     ----          ----
      Net income:
        As reported                                $4,237        $8,132
                                                    =====         =====
        Pro forma                                  $3,667        $7,232
                                                    =====         =====
      Earnings per share:
        As reported - diluted                      $  .68        $ 1.23
                                                    =====         =====
        Pro forma - diluted                        $  .59        $ 1.09
                                                    =====         =====
        As reported - basic                        $  .69        $ 1.25
                                                    =====         =====
        Pro forma - basic                          $  .60        $ 1.11
                                                    =====         =====

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

5.    SEGMENT INFORMATION

      As of  January  1,  1998,  the  Company  adopted  Statement  of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise  and
Related  Information,"  ("SFAS  131")  which requires segment information to be
reported using a management approach. SFAS  131's  management approach is based
on reporting segment information the way management  organizes  segments within
the  enterprise  for making operating decisions and assessing performance.  The
Company has restated  its  prior  year  segment  disclosures  to conform to the
requirements of SFAS 131.

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

                               December 31, 1998

      Financial information by industry segment is as follows:

                                              1998        1997        1996
                                              ----        ----        ----
                                                     (In thousands)
Revenues from external customers:
   Testing Products                         $21,596     $23,464     $17,697
   Services                                   9,249      20,312      12,990
   Power Sources                              2,698       3,444       5,073

Inter-segment revenues:
   Testing Products                               -       1,823         649
   Services                                     307         317          58
   Eliminations                                (307 )    (2,140 )      (707 )
                                             ------      ------      ------
                                            $33,543     $47,220     $35,760
                                             ======      ======      ======
Operating income (loss):
   Testing Products                         $ 5,589     $ 8,012     $ 4,243
   Services                                   2,149       4,975       3,098
   Power Sources                               (546 )      (270 )       603
   Provision for restructuring of
      Services operations                      (607 )         -           -
   General corporate expenses                  (371 )      (407 )      (451 )
                                             ------      ------      ------
                                            $ 6,214     $12,310     $ 7,493
                                             ======      ======      ======
Total assets:
   Testing Products                         $ 6,702     $13,393     $ 8,649
   Services                                   9,177      10,927       8,205
   Power Sources                              2,058       2,191       2,580
   General corporate assets                  15,309       3,290       7,169
                                             ------      ------      ------
                                            $33,246     $29,801     $26,603
                                             ======      ======      ======
Depreciation and amortization:
   Testing Products                         $   717     $   538     $   520
   Services                                   1,125 (1)     970         811
   Power Sources                                 74         105         107
                                             ------      ------      ------
                                            $ 1,916     $ 1,613     $ 1,438
                                             ======      ======      ======
      (1) Includes amortization of $16,000 in 1998

Capital expenditures:
   Testing Products                         $   445     $   641     $   368
   Services                                     382       2,331       1,345
   Power Sources                                 26          74          41
                                             ------      ------      ------
                                            $   853     $ 3,046     $ 1,754
                                             ======      ======      ======
                                     F-21
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998


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

      Financial information by geographic area is as follows:

                                              1998        1997        1996
                                              ----        ----        ----
                                                     (In thousands)
Revenues from external customers:
   United States                            $22,657     $28,027     $22,492
   Singapore                                  8,188      15,749       8,195
   Costa Rica                                 2,698       3,444       5,073

Inter-geographic revenues:
   United States                                  -       1,823         649
   Singapore                                    307         317          58
   Eliminations                                (307 )    (2,140 )      (707 )
                                             ------      ------      ------
                                            $33,543     $47,220     $35,760
                                             ======      ======      ======

Property, plant and equipment, net:
   United States                            $ 4,212     $ 6,957     $ 6,655
   Singapore                                  4,495       2,857       1,674
   Costa Rica                                   829         868         928
                                             ------      ------      ------
                                            $ 9,536     $10,682     $ 9,257
                                             ======      ======      ======

      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 (see Note 11)  accounted
for approximately  88%,  90% and 82% of consolidated revenues in 1998, 1997 and
1996, 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-22
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998


      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
                             --------         --------        --------
      1998
      ----
      Customer A               34 %               x
      Customer B               29                 x
      Customer C               21                                 x
      Customer D                4                                 x

      1997
      ----
      Customer A               29 %               x
      Customer B               19                 x
      Customer C               32                                 x
      Customer D               10                                 x

      1996
      ----
      Customer A               32 %               x
      Customer B               14                 x
      Customer C               22                                 x
      Customer D               14                                 x




















                                     F-23
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998

6.    EARNINGS PER SHARE

      The  following  table  sets  forth  the  computation of diluted and basic
earnings per share (in thousands, except per share data):

                                               1998        1997       1996
                                               ----        ----       ----
Numerator for basic and diluted
   earnings per share - net income            $4,237      $8,132     $4,846
                                               =====       =====      =====
Denominator:
   Denominator for basic earnings per
      share - weighted average shares
      outstanding                              6,111       6,500      8,486

   Dilutive effect assuming conversion
      of stock options (as determined by
      the application of the treasury stock
      method)                                     90         104          -
                                               -----       -----      -----
   Denominator for diluted earnings per
      share - adjusted weighted average
      shares and assumed conversions           6,201       6,604      8,486
                                               =====       =====      =====
Earnings per share:
   Diluted                                    $  .68      $ 1.23     $  .57
                                               =====       =====      =====
   Basic                                      $  .69      $ 1.25     $  .57
                                               =====       =====      =====

      Shares and earnings per share have been adjusted  to reflect the two-for-
one stock split effected in the form of a dividend in September 1997.

      There  were  253,000,  242,000,  432,000 and 30,000 options  to  purchase
shares of common stock that were outstanding  during  the first two quarters of
1998,  the third quarter of 1998, the fourth quarter of  1998  and  the  fourth
quarter  of  1997,  respectively,  that were not included in the computation of
diluted earnings per share because including  the  options  in the calculations
would have been anti-dilutive.











                                     F-24
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998

7.    EMPLOYEE STOCK SAVINGS PLAN

      The Company sponsors an Employee Stock Savings Plan (the  "Plan"). United
States  employees  of  the  Company  who have completed at least six months  of
service  become  participants in the Plan.  The  Plan  allows  an  employee  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 contributes  a  matching  amount  to the
Plan  equal  to  50%  of  the  employee's  contribution. 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 maximum profit sharing contribution  is  5%  of
compensation. The Company's contributions  for  matching,  voluntary and profit
sharing contributions were $386,000 in 1998, $501,000 in 1997  and  $129,000 in
1996.  Employee  contributions  may  be  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.

      In May 1992, the Company registered and reserved 500,000 shares of common
stock for sale to the Plan. The Plan purchased in the open market 2,043, 26,867
and 35,550 shares during 1998, 1997 and 1996, for an aggregate  purchase  price
of $25,000, $368,000 and $116,000, respectively. During 1998 and 1997, the Plan
purchased 15,625 and 33,110 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 treasury stock was the closing price  on  the  day
prior  to  purchase  by the Plan. At December 31, 1998, 195,000 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 2003. Rental expense
for 1998, 1997 and 1996 was $321,000, $273,000 and $388,000, respectively.

      Future  minimum  rental  payments under operating  leases  in  effect  at
December 31, 1998 are: 1999 - $596,000;  2000 - $465,000; 2001 - $251,000; 2002
- $133,000, and 2003 - $33,000.

      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
1998, 1997 and 1996 was $179,000, $180,000 and $182,000,  respectively.  Future
income  under the lease will be:  1999 - $179,000; 2000 - $179,000; and 2001  -
$15,000.



                                     F-25
<PAGE>
                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998


9.    ACCRUED LIABILITIES

      Accrued liabilities at December 31, consist of the following:

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

      Payroll                                           $2,490   $3,670
      Other                                                555      756
                                                         -----    -----
                                                        $3,045   $4,426
                                                         =====    =====

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  are 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.
The excess of the purchase  price  over the net identifiable assets acquired of
$1.2 million 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  following pro forma unaudited results of operations  for  the  years
ended December  31,  1997  and  1998  assume  the  purchase  of  BEST  had been
consummated  as  of  January  1  of  each  year.  The  pro  forma statements of
operations summary does not necessarily reflect the results as  they would have
been if these combined companies had constituted a single entity  during  these
periods.








                                     F-26
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998

                                                        1998      1997
                                                        ----      ----
              (In thousands, except per share data)       (Unaudited)

      Revenues                                         $50,371  $60,150
                                                        ======   ======

      Net income                                       $ 7,950  $10,262
                                                        ======   ======
      Earnings per share:
         Diluted                                         $1.19    $1.45
         Basic                                           $1.21    $1.47

      Shares used to compute per share information:
         Diluted                                         6,683    7,079
         Basic                                           6,563    6,975


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

      The   Company's   North   Carolina   services   facility   accounted  for
approximately   4%   and  10%  of  consolidated  revenues  in  1998  and  1997,
respectively, and provided  service  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  1999.  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, and 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.
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.  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.




                                     F-27
<PAGE>

                           RELIABILITY INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

                               December 31, 1998

      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 includes $207,000 for
severance  costs paid to employees who were terminated  during  1998;  $100,000
related  to  disposal  of  excess  equipment  and  $200,000  related  to  costs
associated with excess leased facilities.

12.   SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

      Summarized  quarterly financial data are as follows (in thousands, except
per share amounts):

                              First      Second       Third      Fourth
                             Quarter     Quarter     Quarter     Quarter
                             -------     -------     -------     -------
      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  (1)  1,847       1,305        (702 ) (2)
Earnings (loss) per share:
  Diluted                        .29         .30         .21        (.11 )
  Basic                          .29         .30         .21        (.11 )

      1997
      ----
Net sales                    $ 6,691     $12,609     $13,494     $14,426
Gross profit                   2,981       6,547       7,046       6,993
Net income                       739       2,323       2,667       2,403
Earnings per share:
  Diluted                        .09         .39         .43         .39
  Basic                          .09         .39         .45         .40

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

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

      All per share amounts have been restated to give effect  to a two-for-one
stock  split  effected  as a stock dividend and the adoption of SFAS  128  (See
Notes 1 and 4).







                                     F-28
<PAGE>

                           RELIABILITY INCORPORATED
         SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                 Years Ended December 31, 1998, 1997 and 1996
                                (In thousands)

                                                    1998     1997     1996
                                                    ----     ----     ----
Reserves for obsolete and excess inventory:
   Reserves at beginning of year                    $ 871   $1,509   $  626
   Additions charged to costs and expenses             40      233    1,043
   Amounts charged to reserve                        (136 )   (871 )   (160 )
                                                     ----    -----    -----
   Reserves at end of year                          $ 775   $  871   $1,509
                                                     ====    =====    =====








































                                      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
1998, 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.

                                                     2.1.    Asset     Purchase
               Agreement  among Reliability Incorporated, BEST and Isam Qubain.
               Reference is  made  to Exhibit 1 of the Company's Report on Form
               8-K dated December 3, 1998.

          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 to
               the Company's Quarterly Report on Form 10-Q for the quarter
               ended June 30, 1997.

          3.3  Amendment to Amended and Restated Bylaws. Reference is made to
               Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for
               the quarter ended September 30, 1997.

          21.  List of subsidiaries.

          23.  Consent of Independent Auditors, dated March 12, 1999, related
               to Employee Stock Savings Plan and Trust.

          23.1 Consent of Independent Auditors, dated March 12, 1999, related
               to 1997 Stock Option Plan.

                                      27
<PAGE>

                           RELIABILITY INCORPORATED


          27.  Financial Data Schedule.

   (c)    Reports on Form 8-K.

          On December 17, 1998, the Company filed its report on Form 8-K,
          dated December 3, 1998, with respect to its acquisition of assets
          from Basic Engineering Services and Technology Labs, Inc. (Item 2
          of the report). On February 11, 1999, the Company filed an amendment
          to such Form 8-K, filing the required financial statements.











































                                      28
<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, 1999
                                   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, 1999
                                   BY  /s/  Larry Edwards
                                   Larry Edwards, Chairman of the Board of
                                     Directors, President and
                                     Chief Executive Officer
DATE:    March 15, 1999
                                   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, 1999
         Larry Edwards, Director

         /s/  W. L. Hampton               DATE:    March 15, 1999
         W. L. Hampton, Director

         /s/  John R. Howard              DATE:    March 15, 1999
         John R. Howard, Director

         /s/  Thomas L. Langford          DATE:    March 15, 1999
         Thomas L. Langford, Director

         /s/  A. C. Lederer, Jr.          DATE:    March 15, 1999
         A. C. Lederer, Jr., Director

         /s/  Philip Uhrhan               DATE:    March 15, 1999
         Philip Uhrhan, Director



                                      29
<PAGE>

                           RELIABILITY INCORPORATED

                               INDEX TO EXHIBITS

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

  21.    List of Subsidiaries.                                        31

  23.    Consent of Independent Auditors, dated March 12, 1999,
            related to Employee Stock Savings Plan and Trust.         32

  23.1   Consent of Independent Auditors, dated March 12, 1999,
            related to 1997 Stock Option Plan.                        33

  27.    Financial Data Schedule.                                     34






































                                      30