RELIABILITY INC, S-1, 1995-10-25

RELIABILITY INC
S-1, 1995-10-25
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1995

REGISTRATION NO. 33-

----------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
RELIABILITY INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

TEXAS 3825 75-0868913
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)

16400 PARK ROW, HOUSTON, TEXAS 77084
TELEPHONE: (713) 492-0550
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

MAX T. LANGLEY
16400 PARK ROW, HOUSTON, TEXAS 77084
TELEPHONE: (713) 492-0550
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING
AREA CODE, OF AGENT FOR SERVICE)

----------------
COPIES TO:

BUTLER & BINION, L.L.P. LOCKE PURNELL RAIN HARRELL
1600 FIRST INTERSTATE BANK PLAZA 2200 ROSS AVENUE, SUITE 2200
HOUSTON, TEXAS 77002 DALLAS, TEXAS 75201
ATTN: JOHN W. MENKE ATTN: GUY H. KERR
TELEPHONE: (713) 237-3111 TELEPHONE: (214) 740-8000
TELECOPY: (713) 237-3202 TELECOPY: (214) 740-8800

----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practical following the effective date of this Registration Statement.

----------------
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(2)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, without
par value............. 2,300,000 shares $11.4375 $26,306,250 $9,072
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 300,000 shares solely to cover over-allotments.
(2) Computed pursuant to Rule 457(c) based on the average high and low sales
prices of the Common Stock as reported on the Nasdaq National Market on
October 20, 1995.

----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

RELIABILITY INCORPORATED

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER LOCATION IN PROSPECTUS
-------------------- ----------------------
<S> <C>
1.Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus...... Facing Page of Registration Statement;
Cross Reference Sheet; Outside Cover Page
of Prospectus
2.Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Cover Page; Available Information;
Back Cover Page of Prospectus
3.Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges.............. Prospectus Summary; Risk Factors
4.Use of Proceeds................. Prospectus Summary; Use of Proceeds
5.Determination of Offering
Price......................... Underwriting
6.Dilution........................ Not Applicable
7.Selling Security Holders........ Principal and Selling Stockholders
8.Plan of Distribution............ Front Cover Page of Prospectus;
Underwriting
9.Description of Securities to be
Registered.................... Description of Capital Stock
10.Interests of Named Experts and
Counsel....................... Legal Matters; Experts
11.Information with Respect to the
Registrant.................... Prospectus Summary; Risk Factors;
Capitalization; Price Range of Common
Stock and Dividend Policy; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Principal and
Selling Stockholders
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Not Applicable
</TABLE>
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 25, 1995

2,000,000 SHARES

[LOGO APPEARS HERE]

COMMON STOCK

Of the 2,000,000 shares of Common Stock offered hereby, 1,000,000 shares are
being sold by Reliability Incorporated ("Reliability" or the "Company") and
1,000,000 shares are being sold by the Selling Stockholder. See "Principal and
Selling Stockholders." The Company will not receive any proceeds from the sale
of shares by the Selling Stockholder.

The Common Stock is quoted on the Nasdaq National Market under the symbol
"REAL." On October 23, 1995, the last reported sales price of the Common Stock
on the Nasdaq National Market was $10.625 per share. See "Price Range of Common
Stock and Dividend Policy."

-----------

SEE "RISK FACTORS" ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING STOCKHOLDER
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
- --------------------------------------------------------------------------------
Total(3)................. $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $190,000.
(3) The Selling Stockholder and the Company have granted the Underwriters a
30-day option to purchase up to an additional 300,000 shares of Common
Stock (with up to 270,221 shares to be purchased first from the Selling
Stockholder and the remaining shares to be purchased from the Company) on
the same terms and conditions as set forth above solely to cover over-
allotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discount, Proceeds to Company and Proceeds to
Selling Stockholder will be $ , $ , $ and $ , respectively. See
"Underwriting."

-----------

The shares are offered by the Underwriters, subject to prior sale, when, as
and if issued to and accepted by the Underwriters, and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
delivery of the shares will be made against payment therefor in New York, New
York on or about , 1995.

-----------

SOUTHCOAST CAPITAL JOSEPHTHAL LYON & ROSS
CORPORATION INCORPORATED

The date of this Prospectus is , 1995
<PAGE>

[Photo appears here] CRITERIA 18-HD BURN-IN AND TEST SYSTEMS are
designed to burn-in large quantities of
integrated circuits. A partial list of
optional features available includes: computer
controlled burn-in plans, Reliability's RELNET
networking system, electronic voltage and
signal monitoring, solid state switching and
chamber dissipation of up to 15KW.

INTERSECT MEMORY TEST SYSTEMS provide
burn-in and functional testing on large
quantities of DRAMs and SRAMs. These
systems can include the following features: [Photo appears here]
algorithmic pattern generator, computer
controlled test plans, automated
calibration, built in maintenance and
diagnostics, and Reliability's RELNET
networking system.

[logo](R), RELIABILITY(R), CRITERIA(R), V-PAC(R), Z-PAC(R), INNOVATION(R),
and TELECOM-PAC(R) are registered trademarks of the Company. TITAN(TM),
INTERSECT(TM), RELNET(TM), EX-SERT(TM), UNLOADER(TM), S-PAC(TM), LAN-PAC(TM),
ISDN-PAC(TM), RK-94(TM), SERIES 1000(TM) and CRITERIA 18-HD(TM) are trademarks
of the Company.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Consolidated Financial
Statements and the Notes thereto appearing elsewhere herein. Unless otherwise
indicated, the information in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised. References herein to "Reliability"
or the "Company" include Reliability Incorporated and its predecessors and
subsidiaries unless the context requires otherwise.

THE COMPANY

Reliability is a leader in designing, manufacturing, marketing and supporting
high performance equipment used to condition and test integrated circuits
("Conditioning Products"). The Company also operates service facilities which
condition and test integrated circuits for others ("Services") and designs,
manufactures and markets a line of DC-DC power converters ("Power Sources").
The Company's strategy for each of these three business segments is to target
key customers and other prospects who are market leaders, to provide high-
quality products and services, to develop long-term relationships with its
customers by investing in specific research and development to meet their
needs, and to continuously reduce both the customers' and the Company's costs
and time to market. In a globally competitive environment, the Company must
offer quality, leading-edge products and services at competitive prices as well
as world-wide sales, service, and applications support.

SEMICONDUCTOR INDUSTRY OVERVIEW

Under current semiconductor technology and manufacturing processes,
manufacturers are unable consistently to 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., to
subject them, during a relatively short period of time, to controlled stresses
which simulate the first several hundred hours of operation) in an effort to
identify defects prior to delivery. Such conditioning subjects the ICs to
maximum rated temperatures, voltages and electrical signals. Following burn-in,
an IC is tested to determine whether it functions as designed.

As the performance of semiconductors has increased and their physical size
and cost per function have decreased, the demand for semiconductors has
expanded not only in the computer systems market but also in the markets for
telecommunications, automotive products, consumer goods and industrial
automation and control. Integrated Circuit Engineering Corporation, an
independent industry analyst, estimates that the semiconductor market will
increase from $144 billion in 1995 to $331 billion in 2000. Two primary
segments of this market are memory, most notably DRAM devices ("DRAMs"), and
micrologic devices. In-Stat, an independent industry publication, estimates
that sales for DRAMs and micrologic devices will grow at compound annual rates
of 34% and 27%, respectively, from 1995 to 1999. To meet this anticipated
growth, semiconductor manufacturers are currently making significant
investments in capital equipment for new facilities and expansion of capacity
at existing facilities.

Semiconductor manufacturers are constantly seeking ways to conserve capital,
enhance quality control and reduce manufacturing costs, including the costs of
"back end" processing of ICs (such as burn-in and testing), which involves
large investments in research and development, equipment, and floor space.
Demand for smaller size, larger memory and higher performance ICs has placed
severe demands on equipment manufacturers to tightly control electrical noise,
handle large amounts of heat and reduce test times. These industry trends have
created in 1995 a strong demand for the Company's conditioning products which
provide functional testing during the burn-in process, and services which
permit manufacturers to outsource the "back end" processing.

3
<PAGE>

CONDITIONING PRODUCTS

The Company has been providing leading technology capital equipment to IC
manufacturers and users to burn-in and test ICs since 1980. The Company's burn-
in and test products contain sophisticated software systems, most of which are
designed and developed by the Company contemporaneously with the related
hardware. This segment of the Company's business provided 43% of the Company's
revenues in 1994, 87% of which was generated by sales of equipment to Intel
Corporation and IBM, two long-standing customers. Through September 30, 1995,
the Company had delivered approximately 2,000 burn-in and burn-in and test
systems.

The Company was one of the first to design, manufacture and market systems
that utilized burn-in and test technology within the same product.
Historically, such equipment was primarily used as a tool for engineering and
quality assurance to qualify and evaluate new designs and diagnose defects and
was not an integral part of the manufacturing process. Currently, IC
manufacturers are implementing functional testing during burn-in as a part of
the manufacturing process. Since 1992, the Company has focused its research and
development on equipment and related software that performs functional testing
during burn-in of DRAMs and micrologic devices. This focus has led to the
development of two major product families--the INTERSECT line for the DRAM
market and the CRITERIA 18 line for the micrologic device market. These product
families are a key element of the Company's growth strategy for this segment.
The Company also designs, manufactures, markets and supports the IDEA and
INNOVATION product lines of related automated IC loading and unloading
equipment.

SERVICES

The Company operates two dedicated service facilities, one in Singapore
dedicated to the burn-in of DRAMs primarily for Texas Instruments and one in
Durham, North Carolina dedicated to processing (burn-in, final test and other
services) DRAMs for Mitsubishi Semiconductor America, Inc. The Services segment
accounted for 34% of the Company's revenues in 1994, 97% of which was generated
by services provided to Texas Instruments and Mitsubishi, two long-standing
customers. The Company believes that outsourcing these types of services to
independent providers, such as the Company, is a strategy that is gaining
popularity with large volume semiconductor manufacturers as they focus on their
core technologies and redeploy their capital accordingly. The Company's growth
strategy for this segment includes: processing larger volumes of DRAMs for its
existing customers as they increase production, increasing the variety of
services the Company performs, and providing additional "top 10" DRAM and
micrologic manufacturers with the same cost effective services that the Company
offers at its existing service facilities.

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 twenty-five watt DC-DC converter market and
designs, manufacturers and markets a wide range of power sources classified
into various product series. The Power Sources segment accounted for 23% of the
Company's revenues in 1994.

The Company's Power Sources segment focuses on specialized needs within the
telecommunications and computer industries and intends to capitalize on its
long-standing relationships with five large original equipment manufacturers,
as well as its substantial distributor network in the U.S. and Europe. The
Company expects that as the telecommunications and computer industries
increasingly adopt lower power components that operate at different voltages
within the same system, the demand for DC-DC converters which can accommodate
these

4
<PAGE>

divergent demands will increase. The Company's growth strategy is to
concentrate engineering resources on developing specialized DC-DC converters
for key customers and then make these products available to the general market
through its distribution network.

The Company's principal executive offices are located at 16400 Park Row,
Houston, Texas 77084, and its telephone number is (713) 492-0550.

RISK FACTORS

For a description of certain factors which should be considered by
prospective investors, see "Risk Factors."

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company...... 1,000,000 shares(/1/)
Common Stock offered by the Selling
Stockholder............................. 1,000,000 shares(/2/)
Common Stock to be outstanding after the
offering................................ 5,242,848 shares(/1/)
Use of proceeds from sale of Common Stock
by the Company.......................... For purchase of facilities and
equipment, reduction of debt and
other general corporate purposes.
The Company will not receive any
proceeds from the sale of the Common
Stock by the Selling Stockholder.
See "Use of Proceeds."
Nasdaq National Market Symbol............ REAL
</TABLE>
- --------
(1) Does not include up to 29,779 shares of Common Stock that may be sold by
the Company pursuant to the Underwriters' over-allotment option.
(2) Does not include up to 270,221 shares of Common Stock that may be sold by
the Selling Stockholder pursuant to the Underwriters' over-allotment
option.

5
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto.

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------- -------------------------
1992 1993 1994 1994 1995
------------ ------------ ------------ ------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product sales....... $ 23,834 $ 19,651 $ 15,470 $13,114 $13,738
Services............ 7,579 7,371 7,957 5,932 7,408
------------ ------------ ------------ ------- -------
Total revenues.... 31,413 27,022 23,427 19,046 21,146
------------ ------------ ------------ ------- -------
Costs of sales:
Product sales....... 13,759 10,986 7,964 6,662 6,149
Services............ 4,376 4,419 4,773 3,479 4,479
------------ ------------ ------------ ------- -------
Total cost of
sales............ 18,135 15,405 12,737 10,141 10,628
------------ ------------ ------------ ------- -------
Gross profit.......... 13,278 11,617 10,690 8,905 10,518
------------ ------------ ------------ ------- -------
Operating expenses:
Marketing, general
and
administrative..... 11,813 7,975 7,056 5,504 5,876
Research and
development........ 2,639 889 1,054 755 1,725
Provision for
restructuring...... 1,392 288 -- -- --
------------ ------------ ------------ ------- -------
Total operating
expenses......... 15,844 9,152 8,110 6,259 7,601
------------ ------------ ------------ ------- -------
Operating income
(loss)............... (2,566) 2,465 2,580 2,646 2,917
Interest (income)
expense, net......... 125 43 (154) (75) 37
------------ ------------ ------------ ------- -------
Income (loss) before
income taxes......... (2,691) 2,422 2,734 2,721 2,880
Provision (benefit)
for income taxes..... (46) 53 89 93 909
------------ ------------ ------------ ------- -------
Net income
(loss)(/1/).......... $ (2,645) $ 2,369 $ 2,645 $ 2,628 $ 1,971
============ ============ ============ ======= =======
Net income (loss) per
share(/1/)........... $ (.62) $ .56 $ .62 $ .62 $ .46
============ ============ ============ ======= =======
Average shares
outstanding.......... 4,243 4,243 4,243 4,243 4,243
============ ============ ============ ======= =======
<CAPTION>
AT SEPTEMBER 30, 1995
-------------------------
ACTUAL AS ADJUSTED(/2/)
------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 9,833 $18,668
Total assets................................................. 20,931 29,675
Long-term debt............................................... 2,506 1,517
Stockholders' equity......................................... 12,730 22,474
</TABLE>
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(1) The net loss and net loss per share for 1992 originally reflected the tax
benefit of a net operating loss carryforward as an extraordinary item. The
tax benefit of the net operating loss carryforward has been reclassified
and netted against the income tax provision. See Note 5 to the Consolidated
Financial Statements.
(2) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
the Company at an assumed offering price of $10.625 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."

6
<PAGE>

RISK FACTORS

Prospective purchasers of the shares of Common Stock offered hereby should
carefully consider, together with other information in this Prospectus, the
following factors that may affect the Company.

DEPENDENCE ON KEY CUSTOMERS

Four customers accounted for 73% and 71% of the Company's total revenues in
1993 and 1994, respectively. Two of these customers accounted for 90% and 87%
of the Company's revenues in the Conditioning Products segment in 1993 and
1994, respectively, and the other two accounted for 97% of the Company's
revenues in the Services segment in those years. While the Company believes
that its relationships with its customers are good, the loss of a key customer
or any substantial reduction in orders from any one of these customers could
have a material adverse effect on the Company. The Company's ability to
maintain or increase its sales levels in the future will depend in part upon
its ability to obtain orders from existing and new customers as well as the
financial condition and success of its existing customers. There can be no
assurance that the Company will be able to maintain or continue to increase
the level of its revenues in the future or that the Company will be able to
retain existing customers or to attract new customers. Because the Company's
conditioning products and services have been extensively customized to the
differing requirements of its four key customers, the market for such products
and services may be limited. In addition, since development costs for such
products are high, the Company only develops products for, and provides
services to, customers that it believes have the financial capacity to buy
large enough quantities of products to provide the Company a return on its
investment.

CYCLICAL NATURE OF SEMICONDUCTOR INDUSTRY

The Company's business depends in large part upon the capital expenditures
of manufacturers of ICs and products utilizing ICs. The semiconductor industry
is cyclical and has experienced periodic downturns which have had a severe
effect on the demand for capital equipment. Prior semiconductor industry
downturns and excess capacity have adversely affected the Company's revenues,
gross margin and net income. The need to continue investment in research and
development and maintain an extensive customer service and support capability
worldwide will limit the Company's ability to reduce expenses in the event of
a downturn in the industry.

RAPID TECHNOLOGICAL CHANGES AND PRODUCT DEVELOPMENT

The semiconductor industry is characterized by rapid technological advances
resulting in changing customer requirements and evolving industry standards
requiring frequent new product introductions and enhancements. The Company's
future success will depend in large part on its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments, achieve market acceptance and respond to
constantly evolving customer requirements. The Company will need to continue
to make substantial investments in research and product development in order
to respond to rapid technological changes and to develop and introduce new
products to meet customers' expanding needs and evolving industry standards.
Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements or any significant delays
in product development or introduction could result in a loss of
competitiveness and could have a material adverse effect on the Company. There
can be no assurance that the Company will successfully develop and manufacture
new products or that any product enhancements or new products developed by the
Company will gain market acceptance.

COMPETITION

The markets in which the Company's products are sold are subject to intense
competition and are characterized by rapidly changing technology. The
Company's competitors can be expected to continue to improve the design and
performance of their products and to introduce new products with competitive
price and

7
<PAGE>

performance characteristics. Competitive pressures often necessitate price
reductions which can adversely affect operating results. Although the Company
believes that it has certain technological and other advantages over its
competitors, maintaining such advantages will require a continued high level
of investment by the Company in research and development, marketing and
service. See "Business--Competition."

FLUCTUATION OF OPERATING RESULTS

The Company's operating results fluctuate on a quarterly and annual basis
because of a number of factors. Not only does the cyclical nature of the
semiconductor industry affect the Company's operating results, but the status
of world economic conditions, fluctuations in foreign currency exchange rates
and the timing of product shipments can also affect results. For example,
because the Company's conditioning products have high unit prices, the
acceleration or delay of a small number of shipments from one quarter to the
next can significantly affect the Company's operating results for that quarter
or that year.

DEPENDENCE ON SKILLED EMPLOYEES

The Company is dependent, in part, on its ability to attract and retain
highly skilled managerial, marketing and technical personnel, including
skilled applications and sales engineers. There can be no assurance that the
Company will continue to be successful in attracting and retaining the
personnel it requires to design, manufacture, market and support new and
enhanced products and services.

LIMITED SOURCES OF SUPPLIES

Although there is more than one potential supplier of all material component
parts for the Company's products, the Company currently relies on a single
source of supply for several components. In most cases, the Company is not a
significant purchaser of raw materials from its suppliers and therefore has
little control of either the availability or pricing of component parts for
conditioning products or power sources. Accordingly, the Company is vulnerable
to delays in shipments caused by either a business interruption of a supplier
or an undersupply of parts, and the Company could experience delays or
interruptions while an alternate supplier is procured. Such delays, if
encountered for an extended period, could have a material adverse effect on
the Company. See "Business--Raw Materials and Inventory."

INTELLECTUAL PROPERTY

The Company attempts to protect its proprietary rights through patents,
copyrights, trademarks, trade secrets and license agreements. The Company
believes, however, that its success will depend to a greater extent upon
innovation, technological expertise, service after the sale and customer
relationships. There can be no assurance that the Company will be able to
protect its proprietary rights or that competitors will not be able to develop
similar or superior technology independently. No assurance can be given that
the claims allowed on any patents held by the Company will be sufficiently
broad to protect the Company's technology. No assurance can be given that any
patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages to the Company or that third parties' patents will not adversely
affect the Company. In addition, effective patent, copyright and trade secret
protection may be unavailable or limited. See "Business--Intellectual
Property."

INTERNATIONAL OPERATIONS

The Company has a service facility in Singapore and manufactures all of its
power sources in a free trade zone in Costa Rica. Consequently, the Company is
subject to risks customarily found in foreign operations, such as fluctuation
of currency exchange rates, import and export controls and regulatory policies
of foreign governments. The Company attempts to conduct its business and
financial affairs so as to protect against political and economic risks
applicable to operations in the various countries in which it operates, but
there can be no assurance that the Company will be successful in so protecting
itself. See Note 2 to the Company's Consolidated Financial Statements for
information regarding international operations.

8
<PAGE>

PRODUCTS LIABILITY

Because a power source manufactured by the Company or an IC conditioned
and/or tested by the Company's conditioning products or at one of the
Company's service facilities could fail or cause an injury, the Company could
be subject to a products liability claim. Although the Company has not
experienced any products liability claims, if a claim were to be prosecuted
against the Company, it could have a material adverse effect on the Company.

SHARE PRICE VOLATILITY

The market for securities of technology companies historically has been more
volatile than the market for stocks in general. The trading price of the
Company's Common Stock may be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company, its customers or its
competitors and other events or factors. In addition, the stock market has
from time to time experienced extreme price and volume fluctuations which have
particularly affected the market price for many high technology companies and
which often have been unrelated to the operating performance of these
companies. These broad market fluctuations may adversely affect the market
price of the Common Stock. See "Price Range of Common Stock and Dividend
Policy."

ABSENCE OF DIVIDENDS

No cash dividends have been paid with respect to the Common Stock since
1981, and none are contemplated in the foreseeable future. The Company intends
to retain any earnings to fund research and product development, operations
and marketing. See "Price Range of Common Stock and Dividend Policy."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be $9.7 million, assuming a
public offering price of $10.625 per share and after deducting underwriting
discounts and estimated expenses of the offering. The Company will not receive
any proceeds from the sale of the 1,000,000 shares of Common Stock by the
Selling Stockholder.

The net proceeds to the Company will be used to purchase facilities and
equipment, reduce debt incurred to purchase the Company's Houston, Texas
facility by $1.0 million and for other general corporate purposes. The debt
that will be reduced bears interest at 9% and is payable in monthly
installments, the last of which is currently due April 1, 2010. Pending these
uses, the net proceeds to the Company from this offering will be invested in
investment grade securities and short-term, income-producing investments,
including government obligations and other money market instruments.

9
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1995, and as adjusted to give effect to the issuance and sale of
1,000,000 shares of Common Stock offered by the Company at an assumed offering
price of $10.625 per share and the application of the net proceeds therefrom
as described in "Use of Proceeds." This table should be read in conjunction
with the Consolidated Financial Statements, including the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1995
----------------------------
ACTUAL AS ADJUSTED
------------ ---------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C>
Current maturities of long-term debt............ $ 91 $ 80
============ ============
Long-term debt (excluding current maturities)... $ 2,506 $ 1,517
Stockholders' equity:
Common Stock, without par value, 20,000,000
shares authorized; 4,242,848 shares issued
(5,242,848 shares issued as adjusted)........ 5,926 15,670
Retained earnings............................. 6,804 6,804
------------ ------------
Total stockholders' equity...................... 12,730 22,474
------------ ------------
Total capitalization............................ $ 15,236 $ 23,991
============ ============
</TABLE>

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock is quoted on the Nasdaq National Market under the symbol
"REAL." The following table sets forth for the periods indicated the high and
low last reported sales prices for the Common Stock on the Nasdaq National
Market.

<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
QUARTER ENDED:
March 31, 1993............................................... $ 2.50 $0.81
June 30, 1993................................................ 1.28 0.69
September 30, 1993........................................... 4.88 0.94
December 31, 1993............................................ 5.63 2.50

March 31, 1994............................................... 4.13 2.88
June 30, 1994................................................ 4.25 2.88
September 30, 1994........................................... 4.25 3.38
December 31, 1994............................................ 3.63 1.88

March 31, 1995............................................... 3.25 2.25
June 30, 1995................................................ 6.50 2.75
September 30, 1995........................................... 11.88 9.75
December 31, 1995 (through October 23, 1995)................. 11.94 8.88
</TABLE>

On October 23, 1995, the last reported sales price of the Common Stock on
the Nasdaq National Market was $10.625 per share. On October 6, 1995, there
were approximately 836 holders of record of the Common Stock.

The Company has paid no dividends since 1981. The Company intends to retain
any earnings for use in its business and therefore does not anticipate paying
dividends in the foreseeable future.

10
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial information
for the Company for the years ended December 31, 1990, 1991, 1992, 1993 and
1994. The data has been derived from the consolidated financial statements
which have been audited by Ernst & Young LLP, independent auditors. The table
also sets forth certain financial data (derived from unaudited financial
statements) of the Company at September 30, 1995 (unaudited) and the results
of operations of the Company for the nine months ended September 30, 1994 and
1995 (unaudited). In the opinion of management of the Company, the unaudited
financial statements have been prepared on the same basis as the Company's
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the nine months ended September 30, 1995 are not necessarily
indicative of the results to be expected for the entire fiscal year. The
following table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- -------------------------
1990 1991 1992 1993 1994 1994 1995
------- -------- -------- ------- ------- ------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product sales......... $26,642 $22,027 $23,834 $19,651 $15,470 $13,114 $13,738
Services.............. 7,669 7,585 7,579 7,371 7,957 5,932 7,408
------- -------- -------- ------- ------- ------- -------
34,311 29,612 31,413 27,022 23,427 19,046 21,146
------- -------- -------- ------- ------- ------- -------
Costs and expenses:
Cost of product
sales................ 16,423 13,245 13,759 10,986 7,964 6,662 6,149
Cost of services...... 5,193 4,913 4,376 4,419 4,773 3,479 4,479
------- -------- -------- ------- ------- ------- -------
Total cost of
sales.............. 21,616 18,158 18,135 15,405 12,737 10,141 10,628
------- -------- -------- ------- ------- ------- -------
Gross profit........... 12,695 11,454 13,278 11,617 10,690 8,905 10,518
------- -------- -------- ------- ------- ------- -------
Operating expenses:
Marketing, general and
administrative....... 13,611 11,354 11,813 7,975 7,056 5,504 5,876
Research and develop-
ment................. 3,272 3,105 2,639 889 1,054 755 1,725
Provision for restruc-
turing............... -- 1,000 1,392 288 -- -- --
------- -------- -------- ------- ------- ------- -------
Total operating ex-
penses............. 16,883 15,459 15,844 9,152 8,110 6,259 7,601
------- -------- -------- ------- ------- ------- -------
Operating income
(loss)................ (4,188) (4,005) (2,566) 2,465 2,580 2,646 2,917
Interest (income) ex-
pense, net............ 78 83 125 43 (154) (75) 37
------- -------- -------- ------- ------- ------- -------
Income (loss) before
income taxes.......... (4,266) (4,088) (2,691) 2,422 2,734 2,721 2,880
Provision (benefit) for
income taxes.......... (543) 101 (46) 53 89 93 909
------- -------- -------- ------- ------- ------- -------
Net income
(loss)(/1/)........... $(3,723) $ (4,189) $ (2,645) $ 2,369 $ 2,645 $ 2,628 $ 1,971
======= ======== ======== ======= ======= ======= =======
Net income (loss) per
share(/1/)............ $ (.88) $ (.99) $ (.62) $ .56 $ .62 $ .62 $ .46
======= ======== ======== ======= ======= ======= =======
Average shares out-
standing.............. 4,213 4,242 4,243 4,243 4,243 4,243 4,243
======= ======== ======== ======= ======= ======= =======
<CAPTION>
AT SEPTEMBER 30, 1995
-------------------------
ACTUAL AS ADJUSTED(/2/)
------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $ 6,661 $ 4,298 $ 2,413 $ 5,846 $ 8,854 $ 9,833 $18,668
Total assets........... 17,320 13,615 14,693 11,018 13,284 20,931 29,675
Long-term debt......... -- -- -- -- -- 2,506 1,517
Stockholders' equity... 12,564 8,390 5,745 8,114 10,759 12,730 22,474
</TABLE>
- -------
(1) The net loss and net loss per share for 1992 originally reflected the tax
benefit of a net operating loss carry forward as an extraordinary item.
The tax benefit of the net operating loss carry forward has been
reclassified and netted against the income tax provision. See Note 5 to
the Consolidated Financial Statements.
(2) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered
by the Company at an assumed offering price of $10.625 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."

11
<PAGE>

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

The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto.

OVERVIEW

Historically, the Company has derived the majority of its revenues from the
sale of high performance equipment used to condition and test ICs and, to a
lesser extent, a line of power source products. The balance of the Company's
revenues has been derived from the operation of its service facilities which
condition and test ICs for others. The Services segment has provided a
consistent level of revenues for a number of years. However, revenues from the
Conditioning Products and Power Sources segments have been subject to wider
variations than those of the Services segment. This volatility is a result of
the cyclical nature of the semiconductor industry which frequently results in
industry overcapacity leading to a slow down in capital equipment orders.
Manufacturers in the semiconductor industry are currently making large
investments in capital equipment and facilities to meet the increased demand
for personal computers and other electronic equipment. This demand has
resulted in the production of increased numbers of DRAMs and micrologic
devices, thereby fueling the demand in 1995 for the Company's products and
services to condition and test such devices.

The Company's revenues declined during each of the three prior years, but
the Company now anticipates that 1995 revenues will exceed 1994 revenues by
approximately 40%. The decline in the Company's revenues for conditioning
products during 1993 and 1994 was caused primarily by a customer delaying
purchases of products, by the Company's decision to curtail operations in the
U.K. and Japan and, to a lesser degree, by reductions in conditioning time for
mature generations of microprocessors which created short-term excess
conditioning capacity. These factors resulted in a significant decrease in
backlog in 1994, and, subsequently, a decline in revenues for the first half
of 1995. During this time period, Reliability continued to invest in research
and development and introduced the CRITERIA 18-HD, INTERSECT 2000 and RK-94
specifically for the purpose of conditioning and testing the new and
anticipated future generations of DRAMs and micrologic devices. For the nine
months ended September 30, 1995, orders for these and other Company products
and services increased over 200% to $33.2 million compared to $16.1 million
for the same period in 1994. These orders have increased the Company's backlog
at September 30, 1995, to an all time high of $15.4 million.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
revenues represented by items reflected in the Company's Consolidated
Statements of Operations.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED SEPTEMBER
DECEMBER 31, 30,
-------------------- -------------
1992 1993 1994 1994 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues.................................. 100.0 % 100.0% 100.0 % 100.0 % 100.0%
Cost of sales............................. 57.7 57.0 54.4 53.2 50.3
----- ----- ----- ----- -----
Gross profit............................ 42.3 43.0 45.6 46.8 49.7
----- ----- ----- ----- -----
Operating expenses:
Marketing, general and administrative... 37.6 29.5 30.1 28.9 27.8
Research and development................ 8.4 3.3 4.5 4.0 8.2
Provision for restructuring............. 4.4 1.1 -- -- --
----- ----- ----- ----- -----
Total operating expenses.............. 50.4 33.9 34.6 32.9 36.0
----- ----- ----- ----- -----
Operating income (loss)................... (8.1) 9.1 11.0 13.9 13.7
Interest (income) expense, net............ 0.4 0.2 (0.7) (0.4) 0.2
----- ----- ----- ----- -----
Income (loss) before income taxes......... (8.5) 8.9 11.7 14.3 13.5
Provision (benefit) for income taxes...... (0.1) 0.2 0.4 0.5 4.3
----- ----- ----- ----- -----
Net income (loss)......................... (8.4)% 8.7% 11.3 % 13.8 % 9.2%
===== ===== ===== ===== =====
</TABLE>

12
<PAGE>

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1994.

Revenues. Revenues for the first nine months of 1995 were $21.1 million,
compared to $19.0 million for the same period in 1994. Conditioning Products
and Services revenues for the 1995 period increased $1.4 million and $1.5
million, respectively, while Power Sources revenues decreased $0.8 million.

Demand for conditioning products increased significantly during the first
nine months of 1995, resulting in an increase in backlog in this segment from
$2.6 million at December 31, 1994, to $13.2 million at September 30, 1995.
Revenues from the sale of loader and unloader products increased 113% due to
volume increases, while INTERSECT revenues increased 19% and CRITERIA revenues
increased 2%. Demand for conditioning products decreased during 1994,
resulting in a significant decrease in backlog. Due to the lag time between
order entry and shipment, the 1994 decrease in backlog contributed to a
significant decline in revenues from the sale of INTERSECT products and a
small decrease in revenues from the sale of burn-in products during the first
half of 1995. However, the increase in backlog in 1995 resulted in a sharp
increase in revenues in the third quarter. Revenues for the 1995 nine-month
period increased for all product lines in this segment as a result of customer
orders for equipment to process new generations of memory and micrologic
devices.

Revenues in the Services segment for the first nine months of 1995 were $7.4
million, an increase of 25% over the same period in 1994. Revenues increased
at both of the Company's services facilities. Revenue increases for this
segment were caused by the processing of increased volumes of 4 Meg and 16 Meg
DRAMs and by the sale of burn-in boards to support product mix changes.

Revenues in the Power Sources segment were $3.5 million for the first nine
months of 1995, reflecting an 18% decrease from the same period of 1994. This
decrease was the result of a low backlog at December 31, 1994, caused by
reduced unit volumes and unit prices of the Company's LAN-PAC products.

Costs and Expenses. Total costs and expenses for the first nine months of
1995 increased to $18.2 million, up $1.8 million from the same period in 1994,
while revenues increased $2.1 million.

The increase in gross profit percentage from 47% in the 1994 period to 50%
in the 1995 period was attributable to the Conditioning Products segment and
was caused by volume increases, costs increasing at a rate lower than the
revenue increase, product mix changes and stringent expense controls. The
gross profit percentage in the Services segment decreased slightly while the
gross profit percentage in the Power Sources segment decreased because of
volume and unit price reductions, without a corresponding reduction in
manufacturing overhead.

Marketing, general and administrative expenses for the first nine months of
1995 increased only $0.4 million over the 1994 period. This increase is
primarily related to the Conditioning Products segment and to a lesser extent
to the Services segment and was caused by increases in variable expenses, such
as sales commissions, royalties and warranty expenses, and an increase in
incentive bonus accruals which are directly related to profitability. This
increase in expenses was minimized by strong expense controls, reduced
occupancy expense due to the purchase of the Company's Houston facility and a
decrease in expenses in the Power Sources segment related to revenue
decreases.

Research and development expenses more than doubled from $0.8 million to
$1.7 million in the first nine months of 1995. The increase related to
development costs associated with orders for new models of INTERSECT products
and, to a lesser degree, CRITERIA products, orders for which are included in
the Company's backlog at September 30, 1995. Delivery of these new products
began in 1995.

The change in net interest reflects significant increases in interest
expense and interest income. Interest expense increased due to the incurrence
of debt associated with the purchase of the Company's Houston, Texas facility.
The purchase was consummated in March 1995, but interest on the debt accrued
from December 15,

13
<PAGE>

1994. Interest income increased due to an increase in cash available for
investment and, to a lesser degree, an increase in interest rates.

The Company's effective tax rate increased from 3% for the first nine months
of 1994 to 32% for the nine months ended September 30, 1995. The significantly
lower 1994 rate was principally the result of a $0.4 million tax benefit of a
net operating loss carryforward and a higher change in the valuation allowance
in 1995.

Net Income. Income before income taxes was $2.9 million for the nine months
ended September 30, 1995, compared to $2.7 million for the 1994 nine-month
period. Net income was $2.0 and $2.6 million for the respective periods. As
explained above, the 1995 higher tax rate contributed significantly to the
decrease in net income.

RESULTS OF OPERATIONS FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1994

Overview. Revenues from products sold by the Company declined during the
three-year period ending in 1994. Conditioning Products revenues declined
during such period because of reductions in demand. Services revenues
increased in 1994 due to increased customer demand for conditioning services.
The small decrease in Services revenues in 1993 resulted from revenue
reductions at one of the Company's services facilities. Competition in the
Power Sources segment resulted in a decrease in unit prices and a decrease in
unit volume, contributing to a decline in total revenues.

Revenues. Revenues decreased 13% in 1994 to $23.4 million, reflecting
decreases in the Conditioning Products and Power Sources business segments. In
1993, revenues were $27 million, a decrease of 14% from 1992, reflecting
decreases in both the Conditioning Products and Power Sources segments and a
small decrease in the Services segment.

Reductions in demand caused Conditioning Products revenues to decrease 29%
in 1994 to $10.1 million after decreasing 16% in 1993 to $14.2 million. The
decrease in 1994 was due to a significant decrease in revenues from the sale
of INTERSECT products, a decrease in the unit volumes from the sale of older
model loader and unloader and CRITERIA products and lower average unit prices.
Revenues from the sale of INTERSECT products decreased approximately 5% in
1993 due to a decrease in unit sales prices, resulting from a change in
product mix.

Revenues in the Services segment increased 8% in 1994 to $8 million, after
decreasing 3% in 1993. Revenues related to conditioning services increased at
both of the Company's services facilities due to volume increases. The 1993
reduction in revenues is attributable to product mix changes and unit price
reductions resulting from lower operating costs being passed through to a
customer; however, average unit prices increased during the latter part of
1993 due to a shift in product mix. Revenues included in the Services segment
from the sale of conditioning products to services customers increased during
1993 due to a change in product mix.

Revenues in the Power Sources segment decreased 2% in 1994 to $5.3 million,
after decreasing 22% to $5.4 million in 1993. The revenue decline in 1994
resulted from the net effects of volume decreases and product mix changes
which were partially offset by an increase in the average unit sales price.
The product mix changes resulted from changes in demand, including increased
demand for certain new products offered by the Company. The decrease in 1993
resulted principally from price competition resulting in average unit sale
price and volume decreases.

14
<PAGE>

Costs and Expenses. Changes in costs and expenses during the three-year
period are primarily related to various cost reduction and operational
restructuring measures, decreases in revenue levels and changes in research
and development expenditures.

Total costs and expenses decreased $3.4 million in 1994, excluding the 1993
provision for restructuring. Cost of revenues decreased $2.7 million,
marketing and general and administrative expenses decreased $0.9 million and
research and development expenses increased $0.2 million. The overall
reduction in expenses in 1994 related to a decrease in revenues and variable
expenses, and to a lesser degree, expense reduction programs and productivity
improvements in various operating areas. Total costs and expenses, excluding
the provision for restructuring, decreased $8.3 million in 1993, compared to a
revenue decline of $4.4 million. The overall decrease in 1993 was attributable
to the restructuring of operations, a decline in revenue and variable expenses
and stringent expense reduction programs.

The Company's gross profit, as a percent of revenues, was 46%, 43% and 42%
in 1994, 1993 and 1992, respectively. The 1994 gross profit increase was
related principally to the Power Sources segment due to cost reductions
resulting from productivity improvements, including reductions in scrap and
rework cost, among others. In 1994, gross profit in the Conditioning Products
segment increased slightly and was unchanged in the Services segment. The
modest increase in the Conditioning Products segment resulted from
productivity improvements and cost control measures, which offset the negative
effect of fixed costs during a period of revenue decline. The 1993 gross
profit increase was related to an increase in the Conditioning Products
segment, resulting from a decrease in both fixed and variable manufacturing
costs, changes in product mix, and a reduction in expenses due to shut-down of
the Japanese operation. The small decline in the gross profit in the Services
segment was due principally to an increase in revenues from the sale of burn-
in boards to Services customers. Gross profit on these burn-in boards is
traditionally lower because of price competition. Revenues in the Power
Sources segment declined 22% in 1993, but the gross profit in the segment was
basically unchanged compared to 1992. Total manufacturing costs declined
significantly in the Power Sources segment due to the restructuring of
operations and shifting of all production capacity for this segment to Costa
Rica.

Marketing, general and administrative expenses for 1994 decreased $0.9
million, in comparison to a $3.6 million decrease in revenues. A significant
portion of the decrease related to the decrease in revenues, while reductions
in personnel levels at the Houston facility, for which a restructuring
provision was recorded in the first quarter of 1993, accounted for a lesser
portion of the decrease. Most elements of expenses were reduced throughout
1993 due to stringent expenses controls which remained in effect in 1994. In
addition, expenses decreased in the Conditioning Products segment due to a
decline in variable expenses, such as commissions, royalties and installation
costs associated with the decrease in INTERSECT burn-in and test product
revenues. Marketing, general, and administrative expenses decreased $3.8
million in 1993 in comparison to a $4.4 million decrease in revenues. Expenses
were reduced throughout 1993 by stringent expense reduction programs,
reductions in personnel levels and discontinuation of operations at two
foreign facilities. Approximately 45% of the decrease was due to shut-down of
the UK and Japanese operations in late 1992 and consolidation of Power Sources
manufacturing in Costa Rica. In addition, expenses in the Conditioning
Products segment decreased due to a decline in revenue related expenses, such
as sales commissions and warranty and installation costs.

Research and development expenditures totaled $1.1 million in 1994, compared
to $0.9 million and $2.6 million in 1993 and 1992, respectively. A significant
portion of expenditures in each of the three years related to development of
conditioning and testing products, with a majority of these expenditures being
related to development of the INTERSECT and CRITERIA 18 lines of burn-in and
test systems. The decrease in 1993 resulted from completion of the INTERSECT
30 development project in 1992. Costs associated with development of products
in both the Conditioning Products and Power Sources segments increased in 1994
after declining in 1993.

In 1993, the Company recorded a net provision for restructuring of
operations totaling $0.3 million. The provision was composed of severance pay
for U.S. employees who were terminated in March 1993 and a reduction of the
1992 restructuring provision related to downsizing Power Sources production
capacity in

15
<PAGE>

Singapore. The Company recorded a $1.4 million provision for restructuring
operations in 1992. The provision was composed of $1.0 million for curtailment
of operations in Japan, $0.2 million related to closing of the U.K. facility,
$0.3 million related to reduction of Power Sources manufacturing capacity in
Singapore and a $0.1 million reduction of the 1991 provision for closing of
the Irish power sources facility.

The change in net interest in 1994 reflects a decrease in interest expense
and an increase in interest income. Interest expense decreased due to payment
of all debt balances in the first quarter of 1994. Interest income increased
due to an increase in investable cash balances and an increase in interest
rates. Net interest expense decreased significantly in 1993 due to a reduction
in debt balances during the last half of 1993. Interest income declined in
1993 due to a decrease in investable cash balances.

Provision (Benefit) For Income Taxes. The Company had an effective tax rate
of 3% in 1994, 2% in 1993, and a negative 2% in 1992. The Company's effective
tax rates differed from the U.S. tax rate of 34% due to utilization of
deferred tax assets resulting in a change in the deferred tax valuation
allowance in 1994 and 1993, tax benefits of net operating loss carry forwards
in 1994 and 1992, tax provided on a dividend from a foreign subsidiary in
1992, tax benefits, in 1993, related to expenses incurred in shutting down a
foreign subsidiary, and expenses of foreign subsidiaries for which tax
benefits were not available in 1992.

Net Income. The Company reported net income of $2.6 million and $2.4 million
in 1994 and 1993, respectively, compared to a net loss of $2.6 million in
1992. Net income was affected in 1993 and 1992 by restructuring charges of
$0.3 and $1.4 million. Various factors affected income tax in each of the
years as explained above, resulting in the tax benefit in 1992 and tax
provisions in 1993 and 1994 being substantially less than the statutory 34%
tax rate.

The overall impact of inflation on operations has been minimal except that
the cost of certain raw materials and purchased parts has increased during
1995 at rates somewhat greater than the general inflation rate due to
increases in demand.

LIQUIDITY AND CAPITAL RESOURCES

Management considers cash provided by operations and retained earnings to be
the primary sources of capital. The Company maintains lines of credit to
supplement these primary sources of capital and has, until recently, leased
most of its facilities, reducing the need to expend capital on such items.
Changes in the Company's financial condition and liquidity are generally
attributable to changes in cash flows from operating activities and levels of
capital expenditures.

The Company's financial condition improved significantly during 1993 and
1994 and has remained strong during 1995. Working capital increased to $9.8
million at September 30, 1995, from $8.8 million at September 30, 1994. The
ratio of current assets to current liabilities has declined, but was a very
strong 2.8 at September 30, 1995. The Company's current ratio was unusually
high at December 31, 1994, due to the Company having approximately $6.0
million in cash which was generated by operations during a period of declining
production. Increases in demand for the Company's products and services during
the first nine months of 1995 caused a significant increase in the Company's
backlog at September 30, 1995, compared to December 31, 1994. The operating
effects of the increase in backlog have affected various elements of cash
provided by operations. The potential negative effect of low revenue levels
during the first six months of 1995 were partially offset by expense controls.

Net cash used by operating activities for the nine months ended September
30, 1995, was $2.3 million, compared with $3.9 million provided in the first
nine months of 1994. The principal items contributing to the cash used in
operations in 1995 were increases in accounts receivable and inventories of
$4.6 and $3.6 million, respectively, reduced by net income plus depreciation
of $2.8 million, and increases in accounts payable, accrued expenses and
income taxes payable totalling $3.1 million. The changes are attributable to
the increased level of operations at the Company during 1995, resulting from
increased demand for products and services sold by the

16
<PAGE>

Company. The 1995 backlog increase has resulted in an increase in revenues
during the third quarter of 1995 and a forecasted increase in revenues in the
fourth quarter of 1995.

In the latter part of 1993, the Company used cash flow from operations to
pay off all then-existing bank debt . The Company did not need to utilize its
principal line of credit during 1994 and allowed this line of credit to expire
in November 1994. In July 1995, the Company established a credit facility with
a financial institution to provide credit availability of $2.0 million to
supplement cash provided by operations. To date, this credit facility has not
been utilized. The Company's Singapore subsidiary maintains a small overdraft
facility to support the subsidiary's credit commitments. The subsidiary could
borrow $0.2 million under the facility at September 30, 1995.

Capital expenditures during the first nine months of 1995 and 1994 were $4.5
million and $0.5 million, respectively. Expenditures for 1995 include the
purchase of the Company's Houston, Texas facility for $3.3 million, resulting
in a reduction in the Company's occupancy expenses. The Company currently
anticipates that 1995 capital expenditures may exceed $9.0 million, and will
include fourth quarter 1995 purchases of land and buildings in Costa Rica and
North Carolina for approximately $0.8 million and $2.7 million, respectively.
The 1995 capital expenditures are budgeted to include $6.8 million for land
and buildings and $2.2 million for equipment. A significant portion of the
equipment is required by the Company's services facilities to process
increasing volumes of ICs. The land and building purchases will reduce the
Costa Rica subsidiary's operating costs and will provide a facility for
expansion of the North Carolina services operation. See "Business--
Properties."

The Company believes its cash and cash equivalent balances, future cash
generated from operations, available lines of credit and the proceeds from
this offering will be sufficient to meet the cash requirements of the Company,
including capital expenditures, for the remainder of 1995 and 1996.

17
<PAGE>

BUSINESS

Reliability is a leader in designing, manufacturing, marketing and
supporting high performance equipment used to condition and test integrated
circuits ("Conditioning Products"). The Company also operates service
facilities which condition and test integrated circuits for others
("Services") and designs, manufactures and markets a line of DC-DC power
converters ("Power Sources"). The Company's strategy for each of these three
business segments is to target key customers and other prospects who are
market leaders, to provide high-quality products and services, to develop
long-term relationships with its customers by investing in specific research
and development to meet their needs, and to continuously reduce both the
customers' and the Company's costs and time to market. In a globally
competitive environment, the Company must offer quality, leading-edge products
and services at competitive prices as well as world-wide sales, service, and
applications support. The following table sets forth the percentage of the
Company's total revenues by business segment:

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- ---------------
BUSINESS SEGMENT(/1/) 1992 1993 1994 1994 1995
- --------------------- ---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Conditioning Products........................... 54% 53% 43% 46% 48%
Services........................................ 24 27 34 31 35
Power Sources................................... 22 20 23 23 17
--- --- --- ------ ------
Total revenues................................ 100% 100% 100% 100% 100%
=== === === ====== ======
</TABLE>
- --------
(1) See Note 2 to the Consolidated Financial Statements for further
information on business segments.

The Company's current 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. This company was acquired by and later
merged into the Company. The Company's Singapore facility began operations in
1978 and the Company's Costa Rica facility began operations in 1990. The
Company was incorporated under the laws of Texas in 1953. For information
concerning discontinued operations of the Company, see "--Discontinued
Operations."

SEMICONDUCTOR INDUSTRY OVERVIEW

Under current semiconductor technology and manufacturing processes,
manufacturers are unable consistently to 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., to subject them, during a relatively short period of time, to
controlled stresses which simulate the first several hundred hours of
operation) in an effort to identify defects prior to delivery. Such
conditioning subjects the ICs to maximum rated temperatures, voltages and
electrical signals. Following burn-in, an IC is tested to determined whether
it functions as designed.

18
<PAGE>

larger memory and higher performance ICs has placed severe demands on
equipment manufacturers to tightly control electrical noise, handle large
amounts of heat and reduce test times. These industry trends have created in
1995 a strong demand for the Company's conditioning products and services
which provide functional testing during the burn-in process and services which
permit manufacturers to outsource the "back end" processing.

CONDITIONING PRODUCTS

The Company has been providing leading technology capital equipment to IC
manufacturers and users to burn-in and test ICs since 1980. The Company's
burn-in and test products contain sophisticated software systems, most of
which are designed and developed by the Company contemporaneously with the
related hardware. This segment of the Company's business provided 43% of the
Company's revenues in 1994, 87% of which was generated by sales of equipment
to Intel Corporation and IBM, two long-standing customers. Through September
30, 1995, the Company had delivered approximately 2,000 burn-in and burn-in
and test systems.

Set forth below is the year of introduction, device capacity, power
dissipation and type of semiconductor processed by each of the primary
conditioning products that the Company currently offers:

<TABLE>
<CAPTION>
YEAR DEVICE POWER PRIMARY
PRODUCT TYPE INTRODUCED CAPACITY DISSIPATION(/1/) APPLICATION
- --------------------- ---------- -------- ---------------- -------------------
<S> <C> <C> <C> <C>
BURN-IN
CRITERIA V(/2/)..... 1981 10,752 4KW Micrologic & Memory
CRITERIA VI(/2/).... 1986 16,128 6KW Micrologic & Memory
TITAN............... 1986 6,048 7.5KW Microcontroller
BURN-IN AND TEST
CRITERIA 18......... 1991 1,152 7KW Microprocessors
INTERSECT 30(/3/)... 1992 19,200 -- Memory
CRITERIA 18-HD...... 1994 1,152 15KW Microprocessors
RK-94(/3/).......... 1994 8,064 -- Memory
INTERSECT
2000(/3/).......... 1994 15,360 -- Memory
</TABLE>
- ------------
(1) Power/heat dissipation rate in kilowatts.
(2) 4 Meg DRAMs.
(3) 16 Meg DRAMs.

Burn-in. The Company manufactures burn-in systems marketed under the names
CRITERIA V, CRITERIA VI and TITAN. These products can perform most burn-in
processes, but they do not test the ICs during burn-in. The original CRITERIA
systems were designed for internal use in the Company's service facilities
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. There are several different
models within the product lines, each with a different capacity and burn-in
capability. The CRITERIA V and VI models burn-in relatively large numbers of
similar ICs at one time. The TITAN burn-in products provide a wide range of
flexibility to users with relatively small quantities and multiple types of
ICs to be conditioned. The TITAN products are designed primarily for IC users,
but may also be used by IC manufacturers. CRITERIA V and VI products are
usually purchased by companies that manufacture large volumes of similar ICs,
but they are also purchased by companies that independently burn-in and test
ICs.

Burn-in and Test. The Company was one of the first to design, manufacture
and market systems that utilized burn-in and test technology within the same
product. Historically, such equipment was primarily used as a tool for
engineering and quality assurance to qualify and evaluate new designs and
diagnose defects and was not an integral part of the manufacturing process.
Currently, IC manufacturers are implementing functional testing during burn-in
as a part of the manufacturing process. Since 1992, the Company has focused
its research and development on equipment and related software that performs
functional testing during burn-in of DRAMs and micrologic devices. This focus
has led to the development of two major product families--the INTERSECT

19
<PAGE>

line for the DRAM market and the CRITERIA 18 line for the micrologic device
market. These product families are a key element of the Company's growth
strategy for this segment.

During 1994, Reliability began development of the CRITERIA 18-HD (High
Dissipation) burn-in and test system. 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. Depending on its
features, a CRITERIA 18-HD system sells at a price between $100,000 and
$400,000. 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, which the Company believes is
almost double the dissipation offered by competitive systems, in an
economically sized system without having to use chilled water as a cooling
mechanism. This feature will also allow users to reduce significantly the
amount of floor space required when performing burn-in and test of high power
micrologic devices. The forecasted increase in demand in for microprocessors
and other micrologic devices, which will be driven by the continued high
demand for personal computers for the balance of the 1990s, provides
substantial growth opportunities for this product.

The Company manufactures, under the trade name INTERSECT, systems which
functionally test DRAMs during burn-in. This represents a difference in the
way most DRAMs have historically 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 the INTERSECT system 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 3,840 individual DRAMs at a time, and
are less expensive than serial testers, testing costs per IC can be reduced
30% to 60%.

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 vary in their burn-in and testing
capabilities. The latest generation of INTERSECT products, the INTERSECT 30
("I-30"), was introduced in 1992. The I-30 is capable of functionally testing
19,200 16 Meg DRAMs during the burn-in process in a single chamber. The
Company believes that it provides the highest quality test signal during burn-
in that is available in the industry. It is capable of testing MOS, CMOS,
Bipolar, ECL and Bi-CMOS DRAMs and SRAMs. This system was developed to
exacting standards specified by one of the Company's key customers, and the
Company has invested approximately $6.5 million in research and development
into this system. However, because of its complexity and quality, the sales
price for each I-30 system ranges from $1.3 million to $1.8 million, depending
on its configuration and features. The I-30 provided the base upon which the
Company has built its other INTERSECT products.

During 1994, the Company introduced a lower cost version of the I-30 burn-in
and test system called the INTERSECT 2000 ("I2000"). The I2000 has the
capacity to functionally test 15,360 16 Meg DRAMs during the burn-in process
in a single chamber. It has burn-in board compatibility with the I-30 and its
test signal quality is almost as high as the I-30. Because of its large
processing capacity, the I2000 processes approximately twice the number of
DRAMs as similarly priced competitors' products, thereby reducing per-unit
processing costs to the user. Depending on its configuration and features, an
I2000 unit sells at a price between $500,000 and $700,000.

Also in 1994, Reliability introduced a burn-in and test system known as RK-
94, which is a moderate performance system designed to functionally test 16
and 64 Meg DRAMs during the burn-in process. The RK-94 was developed based
upon the I-30 design. It has the capacity to functionally test 8,064 16 Meg
DRAMs during the burn-in process in a single chamber, and the Company believes
that it provides a better quality test signal during burn-in than any
competing product. In addition, it is designed to automate the loading and
unloading of burn-in boards. Depending on configuration and features, RK-94
units sell at prices between $350,000 and $450,000.

20
<PAGE>

The Company has developed a network integrated burn-in and test management
software system known as RELNET 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, and certain limited manufacturing is also done at the
Company's facility in Singapore.

Ancillary Equipment. The Company also designs, manufactures, markets and
supports automatic loaders and unloaders that transfer ICs to and from burn-in
boards. The INNOVATION Loader/Unloader family of products is designed to offer
flexibility in handling surface mount and dual in-line IC packages. IDEA
Automatic Loader and IDEA Automatic Unloader products provide dedicated high-
volume throughput for dual in-line and surface mount IC packages.

During 1994, Reliability completed development of the INNOVATION 2000 which
further enhances the INNOVATION Loader/Unloader product line. The INNOVATION
2000 provides additional automation features, such as device and burn-in board
handling. These additional features improve productivity by providing
continuous and unattended device loading and unloading, allowing one operator
to handle multiple machines or operations.

SERVICES

The Company operates two dedicated service facilities, one in Singapore
dedicated to the burn-in of DRAMs primarily for Texas Instruments and one in
Durham, North Carolina dedicated to processing (burn-in, final test and other
services) DRAMs for Mitsubishi Semiconductor America, Inc. The Services
segment accounted for 34% of the Company's revenues in 1994, 97% of which was
generated by services provided to Texas Instruments and Mitsibushi, two long-
standing customers. The Company believes that outsourcing these types of
services to independent providers, such as the Company, is a strategy that is
gaining popularity with large volume semiconductor manufacturers as they focus
on their core technologies and redeploy their capital accordingly. The
Company's growth strategy for this segment includes: processing larger volumes
of DRAMs for its existing customers as they increase production, increasing
the variety of services the Company performs, and providing additional "top
10" DRAM and micrologic manufacturers with the same cost effective services
that the Company offers at its existing service facilities.

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

The establishment or expansion of a service facility requires a large
investment of capital. Although capital costs at each facility have
historically been shared by the Company and its customers, the Company is
primarily responsible for providing the building and equipment required at
each service facility in addition to personnel and management. The Company has
recently contracted to purchase a building in Durham, North Carolina to house
and expand its service facility there.

POWER SOURCES

21
<PAGE>

to redefine power needs. The Company specializes in the one watt to twenty-
five watt DC-DC converter market and designs, manufacturers and markets a wide
range of power sources classified into various product series. The Power
Sources segment accounted for 23% of the Company's revenues in 1994.

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

In 1995, the Company continued to develop the use of surface mount
technology in the process of 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 enables products to be assembled in smaller packages and
therefore provides higher power output from smaller units. In 1994, the
Company introduced a new series of wide input range 10 to 25 watt DC-DC
converters, which increased the number of higher wattage units in the product
line.

The Company's Power Sources segment is focusing on specialized needs within
the telecommunications and computer industries and intends to capitalize on
its long-standing relationships with five large original equipment
manufacturers, as well as its substantial distributor network in the U.S. and
Europe. The Company expects that as the telecommunications, computer and other
industries increasingly adopt lower voltage components that operate at
different voltages within the same system, the demand for DC-DC converters
which can accommodate these divergent demands will increase. The Company's
growth strategy is to concentrate engineering resources on developing
specialized DC-DC converters for key customers and then make these products
available to the general market through its distribution network.

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

BACKLOG

The following table sets forth the Company's backlog for each of its
segments at the dates indicated:

<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------
BUSINESS SEGMENT 1994 1995
---------------- ------------ -------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C>
Conditioning Products............................. $1,089 $13,191
Services.......................................... 601 1,012
Power Sources..................................... 690 1,222
------------ -------------
Total........................................... $2,380 $15,425
============ =============
</TABLE>

Backlog for sales of conditioning products and power sources represents
orders for delivery within twelve 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 conditioning
products that are directly related to providing services to customers. The
Company believes its backlog as of September 30, 1995, is firm, although
portions of the backlog are not subject to legally binding agreements.

COMPETITION

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

22
<PAGE>

The primary areas of competition for the Company's Services segment are
price, service level and geographic location. The Singapore test facility
provides services to a major IC manufacturer in Singapore and to companies in
southeast Asia that manufacture and use ICs, and the Durham test facility
provides services to a major IC manufacturer in North Carolina.

The world market for power sources is divided into the merchant and the
captive markets. There are less than one thousand competitors in the merchant
market of the power source manufacturing business, most of which target a
particular application for their business. The Company believes there are
approximately twenty 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.

RESEARCH AND DEVELOPMENT

The semiconductor industry's demand for increasingly complex and
sophisticated equipment requires the Company to continuously develop new
products and services 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 peripheral equipment and options for its
CRITERIA, INTERSECT and other product lines. In 1992, 1993, 1994 and for the
nine months ended September 30, 1995, the Company spent $2.6 million, $0.9
million, $1.0 million, and $1.7 million respectively, on research and
development activities. During 1992, substantially all of the Company's
research and development resources were devoted to the I-30 project and other
conditioning products. The Company completed development of the I-30 in 1992.
Other developmental projects, which are primarily related to the Conditioning
Products segment, are on-going.

INTELLECTUAL PROPERTY

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/or
pending patent applications in the United States and certain other countries
which cover key components of conditioning and testing products and ancillary
equipment.

The Company considers its patents for the EX-SERT 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 maintenance problems, increases the
life of the components and reduces equipment down time. The United States
patent was granted in February 1983, and the Japanese patent was granted in
1986.

The Company also considers its patents 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. A
patent with respect to the floating head mechanism was granted in Europe in
1994, 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
& Trademark Office for use in connection with its products and services,
including "ri (and design)," "RELIABILITY," "CRITERIA," "V-PAC," "Z-PAC,"
"INNOVATION," and "TELECOM-PAC." In addition, the Company uses certain other
trade names which are not presently registered, including "TITAN,"
"INTERSECT," "RELNET," "EX-SERT," "UNLOADER," "S-PAC," "LAN-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.

23
<PAGE>

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

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 utilize
certain parts which it manufactures and components purchased from others. In
most cases, the Company is not a significant purchaser of raw materials from
its suppliers and therefore has little control over either the availability or
pricing of component parts for conditioning products or power sources. Certain
metal fabrications and subassembly functions are performed by others for the
Company. The Company maintains an inventory of components and parts for its
manufacturing activities. There are many sources for most of the raw materials
needed for the Company's manufacturing activities, although a few components
come from sole sources. The Company has not experienced any significant
inability to obtain components or parts, but does experience occasional delays
in receiving certain items.

EMPLOYEES

On September 30, 1995, the Company had 465 employees, of which 60 were
contract employees. Continued growth of the Company is dependent upon the
Company's ability to attract and retain its technical staff and skilled
employees. During recent years, the Company has experienced a relatively low
turnover rate among its U.S. employees. Due to the low unemployment rates in
Singapore and Costa Rica, turnover at Company facilities in these countries
has been high. None of the Company's employees is represented by a labor
union. The Company has not experienced any work stoppages and considers its
relations with its employees to be good.

PROPERTIES

The executive offices, manufacturing and research and development facilities
for conditioning products of the Company are 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, Texas. The
property is subject to a mortgage lien to finance its purchase price. The
Company leased this property until March 1995, when it purchased the property.
The Company occupies 99,000 square feet in the facility and has since 1994
subleased the remaining 32,000 square feet.

A subsidiary of the Company occupies 18,200 square feet of leased space in
Singapore. The Singapore facility provides conditioning services and
manufactures burn-in boards. The Durham service facility is located in 15,300
square feet of leased space. The Company has entered into a contract to
purchase 43,500 square feet of space in Durham for its North Carolina service
facility. In October 1995, a subsidiary of the Company purchased 18,900 square
feet of space in a free trade zone in San Jose, Costa Rica. The plant in Costa
Rica manufactures and sells power sources. The Company believes that these
facilities are adequate for its current needs and that additional space will
be available as needed. See Note 7 to the Company's Consolidated Financial
Statements.

LITIGATION

The Company currently is not a party to any material litigation.

DISCONTINUED OPERATIONS

A subsidiary of the Company began manufacturing power sources in Ireland in
1974 and continued such operations until 1991, when the Company permanently
closed the facility. The Company formed a subsidiary in England in 1984 to
serve as a sales representative and product demonstration facility in Europe.
From 1988 to 1990, such subsidiary also manufactured conditioning systems. In
1992, this subsidiary ceased operations. The Company formed a U.S. Virgin
Islands subsidiary in 1984 to act as a foreign sales corporation and it ceased
operations on December 31, 1992. The Company also formed a subsidiary located
in Tokyo, Japan, in 1987 to serve as a sales and technology center. Operations
at the Japanese subsidiary were discontinued during 1993.

24
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The directors and executive officers of the Company are identified below:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -----------------------------------------------------------------------
<S> <C> <C>
Larry L. Edwards........ 54 Chairman of the Board, President and Chief Executive Officer
Max T. Langley.......... 49 Senior Vice President, Chief Financial Officer, Secretary and Treasurer
J. E. Johnson........... 50 Vice President--Systems Division
James M. Harwell........ 41 Vice President--Site Services
Robert W. Hildenbrand, 47 Vice President--Power Sources Division
Jr.....................
Paul E. Nesrsta......... 39 Vice President--Equipment Marketing
A. C. Lederer, Jr.*..... 82 Director
W. L. Hampton........... 67 Director
Everett Hanlon.......... 65 Director
John R. Howard*......... 62 Director
Thomas L. Langford...... 54 Director
</TABLE>
- --------
* A. C. Lederer, Jr.'s wife is John R. Howard's sister. There is no other
family relationship among the persons named in this table.

It is anticipated that at the Company's next annual meeting of stockholders
in April 1996, Mr. Hampton will not stand for re-election and an additional
director, who is not an officer or employee of the Company, will be elected to
fill the resulting vacancy. Directors are elected for one-year terms.

MR. EDWARDS has been President and Chief Executive Officer of the Company
since 1993 and has been a Director and Chairman of the Board of Directors
since October 1995. From April 1990 to March 1993, he served as President and
Chief Operating Officer of the Company. Mr. Edwards joined the Company in 1977
as Manager of Engineering, Planning and Manufacturing Systems, and
subsequently held the positions of Vice President--Operations, Corporate Vice
President--Systems, and Executive Vice President--Systems. Mr. Edwards was
previously employed by the Digital Systems Group and the Semiconductor Group
of Texas Instruments in various purchasing and material control positions, and
was a supervisor of major projects for the Mandrell Division of Geosource,
Inc.

MR. LANGLEY has been Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company since 1984. Mr. Langley joined the
Company in 1976 as Controller and subsequently held the position of Vice
President--Finance. Mr. Langley is a Certified Public Accountant and worked as
an auditor with Touche Ross and Co. prior to joining the Company. Prior to
joining Touche Ross and Co., Mr. Langley was Controller of Randall
Corporation, an engineering and manufacturing company.

MR. JOHNSON has been Vice President--Systems Division since 1984. Mr.
Johnson joined the Company in May 1978 as Senior Design Engineer, and
subsequently held the positions of Project Manager and Division Manager. Prior
to joining the Company, he was employed by Seiscom Delta as a manufacturing
manager, and by Texas Instruments as a Test Engineer.

MR. HARWELL has been Vice President--Site Services since 1993. Mr. Harwell
joined the Company in 1979 as a Production Planner, and subsequently held the
positions of Managing Director (Ireland), Managing Director (England),
Manufacturing Manager and Division Manager. Prior to joining the Company, he
was employed by Gray Tool Company as a Master Scheduler.

MR. HILDENBRAND has been Vice President--Power Sources Division since
October 1984. He joined the Company in 1978 as a Production Coordinator and
subsequently held the positions of Acting Operations Manager--Power Products,
Manager--Power Products, Managing Director (Ireland), and Manager--World

25
<PAGE>

Wide Power Products Division. Prior to joining the Company, Mr. Hildenbrand
was employed by Cameron Iron Works, Inc. as a Master Scheduler.

MR. NESRSTA has been Vice President--Equipment Marketing since 1993. He
joined the Company in 1981 as a Product Marketing Engineer and subsequently
held the positions of Eastern Regional Systems Sales Manager and Manager,
Burn-in Test Systems. Prior to joining the Company, he was employed by Tejas
Controls as a Sales/Application Engineer.

MR. LEDERER has been a Director of the Company since 1970 and was Chairman
of the Board of Directors of the Company from March 1993 until October 1995.
Mr. Lederer's principal occupation has been that of an investor for more than
the last five years. Mr. Lederer was Chairman of the Board and President of
S.I.P., Inc. from 1958 until his retirement.

MR. HAMPTON has been a Director of the Company since 1984. Mr. Hampton
joined S.I.P. Inc. in 1959 as a Project Engineer and held the positions of
Project Manager and Vice President-Manager of Engineering until 1980 when he
joined S.I.P. Engineering, Inc., the parent company of S.I.P., Inc. From 1984
until his retirement in 1993, Mr. Hampton was President of S.I.P. Engineering,
Inc.

MR. HANLON has been a Director of the Company since 1974. Mr. Hanlon was
President and Chief Executive Officer of the Company from 1974 to 1990 and
Chairman of the Board and Chief Executive Officer of the Company from 1990 to
1993. Mr. Hanlon was previously employed by Texas Instruments, where he held
various positions of increasing responsibility with their Digital Systems
Division, including Design Engineer, Test Systems Marketing Manager, and
Manager of International Operations. Prior to its acquisition by the Company,
he was given responsibility to plan, organize, and operate the Testing Service
Division of TI Supply Company, the distribution arm of Texas Instruments. In
1971, a company of which Mr. Hanlon was President purchased this operation and
in 1974 such company was acquired by the Company.

MR. HOWARD has been a Director of the Company since 1970. He is and has been
for more than five years an attorney in private practice. He also serves as a
Director for Atec, Inc., Coastline Exploration, Inc. and Entron Computer
Corporation.

MR. LANGFORD has been a Director of the Company since 1980. He has been
President of The Parsons Corporation since September 1991. From May 1989 to
September 1991, Mr. Langford was Executive Vice President and Chief Financial
Officer of The Parsons Corporation.

The members of the Company's Compensation Committee are W. L. Hampton and A.
C. Lederer, Jr., neither of whom are or have been officers or employees of the
Company. The Compensation Committee met two times during 1994 and both members
attended both meetings. The Company's Audit Committee, composed of Messrs.
Howard and Langford, met two times during 1994 and both members attended both
meetings. The Audit Committee reviews and approves all services to be
performed by the independent accountants and the fees therefor, consults with
the independent accountants and management with respect to internal controls
and other financial matters, and reviews the results of the year-end audit and
other reports of the independent accountants.

COMPENSATION OF DIRECTORS

Non-employee directors are paid a fee of $1,000 per month and do not receive
any other salary or compensation. Mr. Langford, who does not reside in
Houston, Texas, has waived his fee, but is reimbursed for expenses in
attending meetings.

26
<PAGE>

EXECUTIVE COMPENSATION

The following table provides information as to the compensation paid by the
Company and its subsidiaries, during the years ended December 31, 1994, 1993
and 1992, to the chief executive officer and the four other highest paid
executive officers and directors whose total salary and bonus exceeded
$100,000 in the year ended December 31, 1994.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)(1)
- --------------------------- ---- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Larry L. Edwards.................. 1994 127,506 72,219 0 3,825
Chairman, President and Chief 1993 109,850 34,449 0 3,296
Executive Officer 1992 107,775 0 0 2,738
Max T. Langley.................... 1994 92,712 34,461 0 2,781
Senior Vice President, 1993 85,196 17,533 0 2,556
Chief Financial Officer, 1992 86,819 0 0 2,206
Secretary and Treasurer
J. E. Johnson..................... 1994 91,140 26,259 0 2,734
Vice President 1993 84,220 17,332 0 2,527
1992 85,837 37,073 0 2,181
James M. Harwell.................. 1994 79,056 29,785 0 2,372
Vice President 1993 69,928 18,503 0 884
1992 67,848 0 0 678
Robert W. Hildenbrand, Jr......... 1994 84,300 23,363 0 2,529
Vice President 1993 78,324 2,015 0 2,350
1992 79,825 0 0 2,028
</TABLE>
- --------
(1) Amounts shown in this column represent the Company's matching and annual
contributions to the Employee Stock Savings Plan.

Other than the Employee Stock Savings Plan (the "Plan"), the Company has no
long-term compensation plans, awards or arrangements. All U.S. employees of
the Company who have completed one year of service are covered by the Plan.
The Plan allows an employee to contribute up to 15% of defined compensation to
the Plan. Contributions to the Plan by executive officers have been limited
(6% in 1994 and 5% in 1993) by provisions of the Internal Revenue Code. The
Company contributes a matching amount to the Plan equal to 50% of the
employee's contribution, to a maximum of 2%, for employees who contribute 2%
or more. The Company also contributes, as a voluntary contribution, an amount
equal to 1% of the defined compensation of all covered employees. The Company
has no stock appreciation rights or option plans and grants no options or
stock rights. The Company has no long-term incentive plan, defined benefit or
actuarial plan, employment contracts or termination of employment or change in
control agreements with any executive officer.

27
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to beneficial
ownership of shares of Common Stock prior to the offering made hereby and as
adjusted to reflect the sale of the shares by the Company and the Selling
Stockholder, by: (i) the Selling Stockholder; (ii) all persons known by the
Company to be the beneficial owners of 5% or more of the outstanding shares of
Common Stock; (iii) each director; (iv) each of the executive officers named in
the Summary Compensation Table; and (v) all executive officers and directors of
the Company as a group. Information set forth in the table with respect to
beneficial ownership of Common Stock has been obtained from filings made by the
named beneficial owners with the Securities and Exchange Commission ("SEC") or,
in the case of executive officers and directors of the Company, has been
provided to the Company by such individuals. The following assumes that the
Underwriters' over-allotment option will not be exercised.

<TABLE>
<CAPTION>
COMMON STOCK OWNED COMMON STOCK OWNED
PRIOR TO OFFERING(/1/) AFTER THE OFFERING
------------------------- SHARES ------------------
PERCENT BEING NUMBER OF PERCENT
NAME AND ADDRESS NUMBER OF SHARES OF CLASS OFFERED SHARES OF CLASS
---------------- ---------------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
S.I.P., Inc.(/2/)....... 1,270,221 29.94% 1,000,000 270,221 5.15%
P. O. Box 34311
Houston, Texas 77234
Fidelity Low-Priced
Stock Fund(/3/)........ 250,500 5.90 -- 250,500 4.78
82 Devonshire Street
Boston, Massachusetts
02109
W. L. Hampton(/2/)...... 0 * -- 0 *
Everett Hanlon.......... 29,969 * -- 29,969 *
John R. Howard.......... 200 * -- 200 *
Thomas L. Lang-
ford(/2/).............. 0 * -- 0 *
A. C. Lederer,
Jr.(/2/)............... 7,500 * -- 7,500 *
Larry L. Edwards........ 76,566 1.80 -- 76,566 1.46
Max T. Langley.......... 21,894 * -- 21,894 *
J. E. Johnson........... 9,573 * -- 9,573 *
James M. Harwell........ 8,321 * -- 8,321 *
Robert W. Hildenbrand,
Jr..................... 8,729 * -- 8,729 *
Paul E. Nesrsta......... 5,605 * -- 5,605 *
All executive officers
and directors as a
group (eleven per-
sons).................. 168,357 3.98% -- 168,357 3.21%
</TABLE>
- --------
* Less than one percent.
(1) Each person has the sole power to vote and dispose of the shares shown
except that (i) Mr. Edwards has shared power with his spouse to vote and
dispose of 56,850 shares and (ii) 19,716, 11,794, 9,473, 8,321, 8,729,
5,605 and 63,638 shares have been allocated to Messrs. Edwards, Langley,
Johnson, Harwell, Hildebrand, Nesrsta and all executive officers and
directors as a group, respectively, through their participation in the
Company's Employee Stock Savings Plan (the "Plan"), according to the latest
statement for the Plan, which is as of September 30, 1995. Employees have
the power to vote all shares held in the Plan, but have the power to direct
the sale of only a limited number of the shares, if any.
(2) S.I.P., Inc. ("the Selling Stockholder"), a Houston-based construction
company, is a wholly owned second tier subsidiary of The Parsons
Corporation, which may be deemed to own beneficially the shares of Common
Stock owned by the Selling Stockholder. The Company has been advised that
the Selling Stockholder may be deemed to have shared power to vote and
dispose of the shares owned by it. In the event the Underwriters' over-
allotment option is exercised in full, the Selling Stockholder will not own
any shares of Common Stock following the offering. Mr. Langford is
President of The Parsons Corporation, Mr. Hampton previously served as
President of S.I.P. Engineering, Inc., a subsidiary of The Parsons
Corporation, and Mr. Lederer previously served as President of S.I.P.,
Inc., a subsidiary of S.I.P. Engineering, Inc. See "Management."
(3) According to a Schedule 13G filed by FMR Corp., Edward C. Johnson, III and
Abigail P. Johnson each own approximately 25% of the stock of FMR Corp.,
which controls Fidelity Management & Research Company ("Fidelity"), the
investment advisor to the Fidelity Low-Priced Stock Fund ("Fund"). The
Johnsons, among with other members of the Johnson family, constitute a
group controlling FMR Corp., and thus indirectly control Fidelity, and have
shared power with the board of trustees of the Fund to direct the
disposition and to vote the shares held by the Fund.

28
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, without par value. As of September 30, 1995, 4,242,848 shares of
Common Stock were issued and outstanding.

Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of shareholders.
Such holders do not have the right to cumulate their votes in the election of
directors. Holders of Common Stock have no redemption or conversion rights and
no preemptive or other rights to subscribe for securities of the Company. In
the event of a liquidation, dissolution or winding up of the Company, holders
of Common Stock are entitled to share equally and ratably in all of the assets
remaining, if any, after satisfaction of all debts and liabilities of the
Company. The outstanding shares of Common Stock are validly issued, fully paid
and nonassessable. Holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. KeyCorp Shareholder Services, Inc. is transfer agent and
registrar for the Common Stock.

The Company's Articles of Incorporation provide that, to the fullest extent
permitted by the Texas Business Corporation Act, a director or former director
of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering, the Company will have 5,242,848 shares of
Common Stock outstanding. All such shares will be freely tradeable without
restriction under the Securities Act, except for any such shares which may be
held or acquired by an Affiliate of the Company (as that term is defined in
Rule 144 under the Securities Act). Shares held by Affiliates may be sold in
the open market subject to the applicable requirements of Rule 144 described
below.

In general, under Rule 144 as currently in effect, an Affiliate is entitled
to sell within any three-month period a number of unrestricted shares that
does not exceed the greater of (i) 1% of the then outstanding shares of the
Common Stock or (ii) the average weekly reported trading volume of the Common
Stock during the four calendar weeks preceding the date on which notice of the
sale on Form 144 is filed with the SEC. Sales under Rule 144 are also subject
to certain manner of sale provisions, the availability of current public
information about the Company and certain other limitations and restrictions.

After the offering, sales of substantial amounts of Common Stock by existing
stockholders could have an adverse impact on the market price of the Common
Stock. No predictions can be made as to the effect, if any, that market sales
of shares by existing stockholders or the availability of such shares for
future sale will have on the market price of shares of Common Stock prevailing
from time to time.

29
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and the Selling Stockholder have agreed to sell to the
Underwriters named below (the "Underwriters"), for whom Southcoast Capital
Corporation and Josephthal Lyon & Ross Incorporated are acting as
representatives (the "Representatives"), and the Underwriters have severally
agreed to purchase, the number of shares of Common Stock set forth opposite
their respective names in the table below, at the public offering price less
the underwriting discount set forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Southcoast Capital Corporation....................................
Josephthal Lyon & Ross Incorporated...............................
---------
Total........................................................... 2,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligation of the Underwriters
to purchase the shares of Common Stock is subject to certain conditions. The
Underwriters are committed to purchase all of the shares of Common Stock
(other than those covered by the over-allotment option described below), if
any are purchased. The Underwriting Agreement provides that, in the event of a
default by an Underwriter, in certain circumstances the purchase commitments
of non-defaulting Underwriters may be increased or the Underwriting Agreement
may be terminated.

The Underwriters propose to offer the Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may re-allow, a
discount not in excess of $ per share to certain other dealers. After the
offering of the Common Stock, the public offering price, the concession and
the re-allowance may be changed by the Representatives.

The Selling Stockholder and the Company have granted to the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase
up to 300,000 additional shares of Common Stock (with up to 270,221 shares to
be purchased first from the Selling Stockholder and the remaining shares to be
purchased from the Company) at the public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. To the
extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the
preceding table. The Underwriters may exercise such right of purchase only for
the purpose of covering over-allotments, if any, made in connection with the
sale of the shares of Common Stock.

The Company, its officers and directors and the Selling Stockholder have
agreed not to offer, sell or otherwise dispose of any shares of Common Stock
for a period of 120 days after the date of this Prospectus without the prior
written consent of Southcoast Capital Corporation.

Certain of the Underwriters and selling group members that currently act as
market makers for the Common Stock may engage in "passive market making" in
the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Rule 10b-6A permits, upon the satisfaction of certain conditions, underwriters
and selling group members participating in a distribution that are also Nasdaq
market makers in the security being distributed to engage in

30
<PAGE>

limited market making transactions during the period when Rule 10b-6 under the
Exchange Act would otherwise prohibit such activity. Rule 10b-6A prohibits
underwriters and selling group members engaged in passive market making
generally from entering a bid or effecting a purchase at a price that exceeds
the highest bid for those securities reported on the Nasdaq National Market by
a market maker that is not participating in the distribution. Under Rule 10b-
6A each Underwriter or selling group member engaged in passive market making
is subject to a daily net purchase limitation equal to 30% of such entity's
average daily trading volume during the two full consecutive calendar months
immediately preceding the date of the filing of the Registration Statement of
which this Prospectus is a part under the Securities Act of 1933, as amended
(the "Securities Act") pertaining to the security to be distributed.

The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection
with the offering of the Common Stock, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Butler & Binion, L.L.P., Houston, Texas. Certain legal
matters will be passed upon for the Underwriters by Locke Purnell Rain Harrell
(A Professional Corporation), Dallas and Austin, Texas and for the Selling
Stockholder by Butler & Binion, L.L.P.

EXPERTS

The consolidated historical financial statements of Reliability Incorporated
at December 31, 1993 and 1994, and for each of the three years in the period
ended December 31, 1994, appearing in this Prospectus and the Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports given
upon the authority of such firms as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports and other information with the
SEC. Reports, proxy and information statements and other information filed by
the Company with the SEC pursuant to the informational requirements of the
Exchange Act may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549-
1004, and at the following Regional Offices of the SEC: Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and
New York Regional Office, 7 World Trade Center, New York, New York 10048.
Copies of such material may also be obtained from the Public Reference Section
of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549-1004 at prescribed
rates. Trading of the Common Stock is reported on the Nasdaq National Market.
The Company's registration statements, reports, proxy and information
statements, and other information may also be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.

This Prospectus constitutes a part of a Registration Statement on Form S-1
filed by the Company with the SEC under the Securities Act. This Prospectus
omits certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement for further information
with respect to the Company and the securities offered hereby. Any statements
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement or otherwise filed with the SEC are not
necessarily complete and in each instance reference is made to the copy of
such document so filed. Each such statement is qualified in its entirety by
such reference.

31
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of independent auditors....................................... F-2
Consolidated balance sheets as of December 31, 1993, 1994, and
unaudited September 30, 1995........................................ F-3
Consolidated statements of operations for the years ended December
31, 1992, 1993 and 1994 and for the unaudited nine months ended
September 30, 1994 and 1995......................................... F-4
Consolidated statements of cash flows for the years ended December
31, 1992, 1993 and 1994 and for the unaudited nine months ended
September 30, 1994 and 1995......................................... F-5
Consolidated statements of stockholders' equity for the years ended
December 31, 1992, 1993 and 1994 and for the unaudited nine months
ended September 30, 1994 and 1995................................... F-6
Notes to consolidated financial statements........................... F-7
</TABLE>

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, 1994 and 1993, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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, 1994 and 1993, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.

Ernst & Young LLP

Houston, Texas
February 10, 1995

F-2
<PAGE>

RELIABILITY INCORPORATED

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1993 1994 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 2,882 $ 6,019 $ 1,879
Accounts receivable (Note 3)............... 3,074 2,502 7,116
Inventories (Note 3)....................... 2,356 2,099 5,525
Deferred tax assets (Note 5)............... -- 221 487
Other current assets....................... 314 398 381
------- ------- -------
Total current assets..................... 8,626 11,239 15,388
Property, plant and equipment, at cost (Notes
3 and 10):
Machinery and equipment.................... 11,994 11,247 12,372
Building and improvements.................. 2,543 2,596 5,740
Land....................................... -- -- 230
------- ------- -------
14,537 13,843 18,342
Less accumulated depreciation............ 12,280 11,918 12,868
------- ------- -------
2,257 1,925 5,474
Other assets................................. 135 120 69
------- ------- -------
$11,018 $13,284 $20,931
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 524 $ 369 $ 1,914
Accrued liabilities (Note 8)............... 2,016 1,999 2,865
Current maturities on long-term debt (Notes
3 and 10)................................. 58 -- 91
Income taxes payable (Note 5).............. 18 17 685
Liability for restructuring (Note 6)....... 164 -- --
------- ------- -------
Total current liabilities................ 2,780 2,385 5,555
Long-term debt (Note 10)..................... -- -- 2,506
Deferred tax liabilities (Note 5)............ 124 140 140
Commitments and contingencies (Notes 7 and
10)......................................... -- -- --
Stockholders' equity (Note 4):
Common stock, without par value; 20,000,000
shares authorized; 4,242,848 shares
issued.................................... 5,926 5,926 5,926
Retained earnings.......................... 2,188 4,833 6,804
------- ------- -------
Total stockholders' equity............... 8,114 10,759 12,730
------- ------- -------
$11,018 $13,284 $20,931
======= ======= =======
</TABLE>

See accompanying notes.

F-3
<PAGE>

RELIABILITY INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- --------------------
1992 1993 1994 1994 1995
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales............. $ 23,834 $ 19,651 $ 15,470 $ 13,114 $ 13,738
Services.................. 7,579 7,371 7,957 5,932 7,408
-------- -------- -------- --------- ---------
31,413 27,022 23,427 19,046 21,146
Costs and expenses:
Cost of product sales..... 13,759 10,986 7,964 6,662 6,149
Cost of services.......... 4,376 4,419 4,773 3,479 4,479
Marketing, general and
administrative........... 11,813 7,975 7,056 5,504 5,876
Research and development.. 2,639 889 1,054 755 1,725
Provision for
restructuring (Note 6)... 1,392 288 -- -- --
-------- -------- -------- --------- ---------
33,979 24,557 20,847 16,400 18,229
-------- -------- -------- --------- ---------
Operating income (loss)..... (2,566) 2,465 2,580 2,646 2,917
Interest (income) expense,
net (Note 3)............... 125 43 (154) (75) 37
-------- -------- -------- --------- ---------
Income (loss) before income
taxes...................... (2,691) 2,422 2,734 2,721 2,880
Provision (benefit) for
income taxes (Note 5)...... (46) 53 89 93 909
-------- -------- -------- --------- ---------
Net income (loss)........... $ (2,645) $ 2,369 $ 2,645 $ 2,628 $ 1,971
======== ======== ======== ========= =========
Net income (loss) per
share...................... $ (.62) $ .56 $ .62 $ .62 $ .46
======== ======== ======== ========= =========
</TABLE>

See accompanying notes.

F-4
<PAGE>

RELIABILITY INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- --------------------
1992 1993 1994 1994 1995
-------- ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $ (2,645) $ 2,369 $ 2,645 $ 2,628 $ 1,971
Adjustments to
reconcile net income
(loss) to cash
provided (used) by
operating activities:
Depreciation and
amortization......... 1,761 1,258 1,068 809 875
Provisions for
restructuring........ 1,392 288 -- -- --
Change in deferred tax
assets and
liabilities.......... (51) 31 (205) (194) (266)
(Gain) loss on
disposal of fixed
assets............... 131 352 3 (2) (21)
Provision for
inventory
obsolescence......... 636 262 180 112 155
Exchange (gain) loss.. 62 (49) -- -- --
Increase (decrease) in
operating cash flows:
Short-term
investment........... 100 -- -- -- --
Accounts receivable... (1,510) 1,042 572 777 (4,614)
Inventories........... (2,066) 3,338 77 58 (3,581)
Refundable income
taxes................ 120 -- -- -- --
Other assets.......... 354 457 (109) (171) 59
Accounts payable...... 720 (1,366) (155) (157) 1,545
Accrued liabilities... 274 (978) (17) 233 866
Income taxes payable.. (241) (35) (1) 3 668
Liability for
restructuring........ (491) (1,744) (164) (164) --
-------- ------- ------- --------- ---------
Total adjustments... 1,191 2,856 1,249 1,304 (4,314)
-------- ------- ------- --------- ---------
Net cash provided (used)
by operating
activities............. (1,454) 5,225 3,894 3,932 (2,343)
-------- ------- ------- --------- ---------
Cash flows from
investing activities:
Expenditures for
property, plant and
equipment............. (1,436) (492) (763) (538) (4,464)
Proceeds from sale of
equipment............. 27 15 61 63 71
-------- ------- ------- --------- ---------
Net cash (used) in
investing activities... (1,409) (477) (702) (475) (4,393)
-------- ------- ------- --------- ---------
Cash flows from
financing activities:
Issuance of mortgage
payable............... -- -- -- -- 2,640
Borrowings (payments)
under loan
agreements............ 2,035 (2,457) -- -- --
Conversion of note
payable to long-term
debt.................. -- 393 -- -- --
Payments on long-term
debt.................. -- (335) (58) (58) (43)
-------- ------- ------- --------- ---------
Net cash provided (used)
by financing
activities............. 2,035 (2,399) (58) (58) 2,597
-------- ------- ------- --------- ---------
Effect of exchange rate
changes on cash........ (36) 171 3 11 (1)
-------- ------- ------- --------- ---------
Net increase (decrease)
in cash................ (864) 2,520 3,137 3,410 (4,140)
Cash at beginning of
period................. 1,226 362 2,882 2,882 6,019
-------- ------- ------- --------- ---------
Cash at end of period... $ 362 $ 2,882 $ 6,019 $ 6,292 $ 1,879
======== ======= ======= ========= =========
</TABLE>

See accompanying notes.

F-5
<PAGE>

RELIABILITY INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)

(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)

<TABLE>
<CAPTION>
COMMON STOCK
--------------
RETAINED
EARNINGS TOTAL
SHARES AMOUNT (DEFICIT) AMOUNT
------ ------- --------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1991................. 4,243 $ 5,926 $ 2,464 $ 8,390
Net (loss)................................. -- -- (2,645) (2,645)
----- ------- ------- --------
Balance at December 31, 1992................. 4,243 5,926 (181) 5,745
Net income................................. -- -- 2,369 2,369
----- ------- ------- --------
Balance at December 31, 1993................. 4,243 5,926 2,188 8,114
Net income................................. -- -- 2,645 2,645
----- ------- ------- --------
Balance at December 31, 1994................. 4,243 5,926 4,833 10,759
Net income................................. -- -- 1,971 1,971
----- ------- ------- --------
Balance at September 30, 1995................ 4,243 $ 5,926 $ 6,804 $ 12,730
===== ======= ======= ========
</TABLE>

See accompanying notes.

F-6
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in the consolidated financial statements for the years ended
December 31, 1992 and 1993 have been reclassified to conform to the 1994
presentation.

UNAUDITED INTERIM FINANCIAL INFORMATION

The consolidated balance sheet as of September 30, 1995, and the related
consolidated statements of operations, cash flows and stockholders' equity for
the nine months ended September 30, 1994 and 1995 and related notes (interim
financial information) have been prepared by the Company and are unaudited. In
the opinion of management, the interim financial information includes all
adjustments consisting of only normal recurring adjustments necessary for a
fair statement of the results of the interim periods.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the interim financial
information. The interim financial information should be read in conjunction
with the Company's audited consolidated financial statements appearing herein.
The results for the nine months ended September 30, 1994 and 1995, may not be
indicative of operating results for the full year.

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

<TABLE>
<CAPTION>
SEPTEMBER 30,
1993 1994 1995
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................... $1,702 $1,299 $2,404
Work-in progress................................. 553 726 2,720
Finished goods................................... 101 74 401
------ ------ ------
$2,356 $2,099 $5,525
====== ====== ======
</TABLE>

F-7
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
PROPERTY, PLANT AND EQUIPMENT

For financial statement purposes, depreciation is computed principally on
the straight-line method using lives from 4 to 10 years for leasehold
improvements, 30 years for buildings and the straight-line and double-
declining balance methods using lives from 2 to 8 years for machinery and
equipment.

CONCENTRATION OF RISKS

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

The Company invests primarily in commercial paper, Eurodollars and federal
agency securities. The investments are made through high quality financial
institutions, and investments are made only in those securities which have
been assigned investment ratings in the two most credit-worthy rating
categories.

The Company's revenues are primarily dominated in U.S. dollars and thus the
risk of foreign exchange fluctuations is not material.

INCOME TAXES

The provision for income taxes includes federal, foreign, and state income
taxes. The Company accounts for income taxes under the asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial reporting amounts and tax basis of assets and liabilities. Deferred
tax assets are recognized, net of any valuation allowance, for deductible
temporary differences and net operating loss and tax credit carryforwards.
Deferred tax expense represents the change in the deferred tax asset or
liability balances.

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. A subsidiary
that was dissolved in 1994 used the local currency as its functional currency
and translation adjustments were immaterial.

F-8
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)

2. INFORMATION ON BUSINESS SEGMENTS AND GEOGRAPHIC AREAS

The Company operates in three industry segments: (1) manufacture of
conditioning products which are used in conditioning and testing of integrated
circuits; (2) conditioning services which condition and test integrated
circuits and (3) manufacture of power sources. Corporate assets are cash
investments which are classified as cash equivalents.

Financial information by industry segment is as follows:

<TABLE>
<CAPTION>
1992 1993 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from unaffiliated customers:
Conditioning products........................... $16,840 $14,218 $10,132
Conditioning services........................... 7,579 7,371 7,957
Power sources................................... 6,994 5,433 5,338
------- ------- -------
$31,413 $27,022 $23,427
======= ======= =======
Operating income (loss):
Conditioning products........................... $(1,910) $ 1,892 $ 843
Conditioning services........................... 1,854 1,384 1,525
Power sources................................... (849) (190) 539
Provision for restructuring of operations:
Conditioning products......................... (1,108) (280) --
Power sources................................. (284) (8) --
General corporate expenses...................... (269) (333) (327)
------- ------- -------
$(2,566) $ 2,465 $ 2,580
======= ======= =======
Identifiable assets:
Conditioning products........................... $ 8,922 $ 5,718 $ 3,301
Conditioning services........................... 2,634 2,905 2,790
Power sources................................... 3,077 2,395 1,806
General corporate assets........................ 60 -- 5,387
------- ------- -------
$14,693 $11,018 $13,284
======= ======= =======
Depreciation:
Conditioning products........................... $ 627 $ 341 $ 290
Conditioning services........................... 762 597 194
Power sources................................... 336 271 547
------- ------- -------
$ 1,725 $ 1,209 $ 1,031
======= ======= =======
Capital expenditures:
Conditioning products........................... $ 422 $ 248 $ 127
Conditioning services........................... 933 191 559
Power sources................................... 81 53 77
------- ------- -------
$ 1,436 $ 492 $ 763
======= ======= =======
</TABLE>

F-9
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)

Financial information by geographical area is as follows:

<TABLE>
<CAPTION>
1992 1993 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States................................... $23,059 $19,469 $14,567
Asia and Pacific................................ 6,459 4,755 4,122
Central America................................. 1,895 2,798 4,738
Intergeographic revenues:
United States................................... 956 120 129
Asia and Pacific................................ 1,453 408 --
Central America................................. 935 911 289
Eliminations.................................... (3,344) (1,439) (418)
------- ------- -------
$31,413 $27,022 $23,427
======= ======= =======
Operating income (loss):
United States................................... $ (198) $ 2,798 $ 2,579
Asia and Pacific................................ (812) 197 (45)
Central America................................. 105 95 373
Provision for restructuring of operations:
United States................................. -- (319) --
Asia and Pacific.............................. (1,325) 31 --
Western Europe................................ (67) -- --
General corporate expenses...................... (269) (337) (327)
------- ------- -------
$(2,566) $ 2,465 $ 2,580
======= ======= =======
Identifiable assets:
United States................................... $ 9,065 $ 7,349 $ 9,445
Asia and Pacific................................ 4,497 2,100 2,098
Central America................................. 1,131 1,569 1,741
------- ------- -------
$14,693 $11,018 $13,284
======= ======= =======
</TABLE>

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 conditioning products and services
sold by the Company. The Company's four largest customers accounted for
approximately 67%, 73% and 71% of consolidated revenues in 1992, 1993 and
1994. Accounts receivable are generally due within 30 days and collateral is
not required except that export sales from the United States generally require
letters of credit. Historically, the Company's bad debts have been very low,
an indication of the credit worthiness of the customers to which the Company
sells.

Intersegment sales, which are not material, and intergeographic sales of
manufactured products are priced at cost plus a reasonable profit.

F-10
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)

The Company had export revenues from its United States operation to the
following geographical areas:

<TABLE>
<CAPTION>
1992 1993 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Asia and Pacific........................................ $2,605 $2,165 $3,643
Europe.................................................. 4,331 3,140 1,357
North America and other................................. 726 457 215
------ ------ ------
$7,662 $5,762 $5,215
====== ====== ======
</TABLE>

Revenues from major customers, as a percent of total revenues and industry
segments, are as follows:

<TABLE>
<CAPTION>
TOTAL CONDITIONING CONDITIONING POWER
REVENUES PRODUCTS SERVICES SOURCES
-------- ------------ ------------ -------
<S> <C> <C> <C> <C>
1992
Customer A...................... 13% 24% --% 1%
Customer B...................... 11 -- 46 --
Customer C...................... 12 -- 49 --
Customer D...................... 31 57 -- --
1993
Customer A...................... 24% 46% --% --%
Customer B...................... 14 -- 52 --
Customer C...................... 12 -- 45 --
Customer D...................... 23 44 -- --
1994
Customer A...................... 27% 63% --% --%
Customer B...................... 17 -- 47 5
Customer C...................... 17 -- 50 --
Customer D...................... 10 24 -- --
</TABLE>

3. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

On July 1, 1995, the Company entered into a revolving credit agreement with
First Interstate Bank of Texas, N.A. The facility allows borrowings through
July 1, 1997 of up to $2,000,000 at the bank's base rate (8.75% at September
30, 1995). Credit availability is limited to 80% of eligible accounts
receivable, as defined, of the U.S. Company and its Costa Rica subsidiary,
plus 30% of U.S. inventories, limited to $750,000. The credit facility
requires compliance with certain financial loan covenants related to tangible
net worth, current ratio, debt to tangible net worth and fiscal year-end
losses. The loan is unsecured except that if the Company is not in compliance
with certain financial covenants, accounts receivable, inventories and certain
other assets of the U.S. Company will become collateral for the loan. The
Company is in compliance with the financial requirements of the agreement.

The Company maintained a working capital financing agreement with Nations
Bank of Texas, N.A. until November 1994, when the Company allowed the
agreement to expire. Under the agreement, the Company could request loan
advances, evidenced by demand notes, up to $2,500,000. Interest was payable
monthly at the bank's base rate plus 2.5%. There were no balances outstanding
at December 31, 1993, and the Company did not draw

F-11
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)
any funds under the agreement during 1994. The weighted average interest rate
at December 31, 1993 was 8.5%. The loan was collateralized by the U.S.
Company's accounts receivable, inventories, fixed assets and certain other
assets.

The Company's Singapore subsidiary maintains an agreement with a Singapore
bank to provide an overdraft facility of 500,000 Singapore Dollars (U.S.
$340,000) to the subsidiary at the bank's prime rate plus 1% (6.75% at
December 31, 1994). There were no balances outstanding at December 31, 1994,
and amounts utilized under credit commitments totalled $134,000, resulting in
credit availability of $206,000 at December 31, 1994. The weighted average
interest rate at December 31, 1993 was 6%. The loan is collateralized by all
assets of the subsidiary and requires maintenance of a minimum net worth of
the Singapore subsidiary. Payment of dividends requires written consent from
the bank, and continuation of the credit facility is at the discretion of the
bank.

The Company's Japanese subsidiary maintained an agreement with a related
party of the subsidiary to provide a credit facility to the subsidiary. The
related party of the subsidiary obtained a line of credit from a Japanese bank
and made the amount available to the Company. In April 1993, the loan was
converted to a term loan payable in monthly installments of $9,900, plus
interest paid quarterly. At December 31, 1993, the total loan balance was
$58,000. The Company made certain advance payments, and the loan was paid in
full in March 1994.

Interest paid on debt during 1992, 1993 and 1994 and during the nine month
period ended September 30, 1995, was $134,000, $82,000, $1,000 and $187,000,
respectively.

Interest (income) expense is presented net as follows (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
1992 1993 1994 1994 1995
----- ---- ----- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest (income)....................... $ (22) $(15) $(158) $(79) $(151)
Interest expense........................ 147 58 4 4 188
----- ---- ----- ------ -------
Interest (income) expense, net.......... $ 125 $ 43 $(154) $(75) $ 37
===== ==== ===== ====== =======
</TABLE>

4. EMPLOYEE STOCK PLAN

The Company sponsors an Employee Stock Savings Plan and Trust (the "Plan").
United States employees of the Company who have completed at least one year 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, to a maximum of 2%, for
employees who contribute 2% or more. The Company also contributes, as a
voluntary contribution, an amount equal to 1% of the defined compensation of
all participants. The Company's contribution for matching and voluntary
contributions amounted to $121,000 in 1992, $105,000 in 1993 and $106,000 in
1994. Employee contributions may be invested in Company stock or other
investment options offered by the Plan. The Company's contributions vest with
the employee over seven years and are invested solely in Company stock.

F-12
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)

The Company, in May 1992, registered and reserved 500,000 shares of common
stock for sale to the Plan. The Plan purchased, in the open market, 78,288,
64,115 and 47,015 shares during 1992, 1993 and 1994, for an aggregate purchase
price of $143,000, $150,000 and $159,000, respectively. At December 31, 1994,
352,377 reserved shares remain unissued under the registration.

5. INCOME TAXES

Effective January 1, 1993, the Company changed its method of accounting for
income taxes and adopted Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes" which requires an asset and liability
approach to financial accounting and reporting for income taxes.

The cumulative effect of adopting SFAS 109 on the Company's financial
position and results of operations was not material. As permitted under the
new rules, prior period financial statements have not been restated except
that the tax benefit from utilization of a net operating loss carryforward in
1992 has been reclassified to the provision for income taxes. This
reclassification results in income tax for 1992 being presented in a manner
consistent with the presentation required under SFAS 109.

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

<TABLE>
<CAPTION>
GEOGRAPHIC AREA 1992 1993 1994
--------------- ------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
United States.................................... $ (442) $2,187 $2,534
Foreign.......................................... (2,192) 145 137
Eliminations and corporate items................. (57) 90 63
------- ------ ------
$(2,691) $2,422 $2,734
======= ====== ======

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

<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
1992
Federal-Provision.............................. $ 344 $ -- $ 344
Federal Tax Benefit from utilization of net
operating loss carryforward................... (316) -- (316)
Foreign........................................ (28) (51) (79)
State.......................................... 5 -- 5
------- ------ ------
$ 5 $ (51) $ (46)
======= ====== ======
1993
Federal........................................ $ -- $ -- $ --
Foreign........................................ 17 31 48
State.......................................... 5 -- 5
------- ------ ------
$ 22 $ 31 $ 53
======= ====== ======
1994
Federal........................................ $ 245 $ (205) $ 40
Foreign........................................ -- -- --
State.......................................... 49 -- 49
------- ------ ------
$ 294 $ (205) $ 89
======= ====== ======
</TABLE>

F-13
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)

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

<TABLE>
<CAPTION>
SEPTEMBER
30,
------------
1992 1993 1994 1994 1995
----- ---- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision (benefit) at statutory rate........ $(915) $823 $ 930 $ 925 $ 979
Change in valuation allowance................ -- (334) (650) (381) (238)
Tax benefit of net operating loss
carryforward................................ (316) -- (135) (355) --
Tax effects of:
Foreign expenses for which a tax benefit
(is available) is not available........... 778 (495) (26) (37) 58
Foreign tax benefit of export processing
exemption................................. (19) (64) (96) --
U.S. Federal tax on dividend from foreign
subsidiary................................ 486 -- -- --
Alternative minimum tax...................... 29 -- -- -- --
Other........................................ (89) 59 34 37 110
----- ---- ----- ----- -----
$ (46) $ 53 $ 89 $ 93 $ 909
===== ==== ===== ===== =====
</TABLE>

The Company's cash requirements made it necessary for the Singapore
subsidiary to remit a cash dividend to the Company during the second quarter
of 1992. U.S. income taxes of $486,000 were provided on the remittance.

The significant components of the Company's net deferred tax liabilities and
assets are as follows (in thousands):

<TABLE>
<CAPTION>
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation................................... $ 96 $ 103 $ 140
Domestic international sales corp. dividend.... 42 21 --
Other.......................................... 15 -- --
------- ------- -------
Total deferred tax liabilities............... 153 124 140
------- ------- -------
Deferred tax assets:
Reserves not currently deductible.............. (559) (416) (397)
Foreign tax credits............................ (531) (490) (469)
Alternative minimum tax credits................ (74) (74) (154)
Net operating loss carryforwards............... (370) (255) (60)
Business tax credits........................... (253) (253) --
Provision for restructuring.................... (98) -- --
Other.......................................... (18) (21) --
------- ------- -------
Total deferred tax assets.................... (1,903) (1,509) (1,080)
Valuation allowance.............................. 1,843 1,509 859
------- ------- -------
Net deferred tax assets........................ (60) -- (221)
------- ------- -------
Net deferred tax (asset) liability............. $ 93 $ 124 $ (81)
======= ======= =======
</TABLE>

F-14
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)

Net income for 1992 and 1994 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 1996 and is 50% exempted from 1997 through
2000. Except for 1994 and 1992, the subsidiary has operated at a loss. Tax
benefits of $19,000 and $64,000 relate to income of the subsidiary, in 1992
and 1994, respectively.

At December 31, 1994, the Company had alternate minimum tax credit
carryforwards of $154,000, which can be carried forward indefinitely, and
foreign tax credit carryforwards of $469,000 expiring in 1997 and 1998 and a
foreign subsidiary of the Company had an income tax net operating loss
carryforward of $219,000, which can be carried forward indefinitely.

SFAS 109 requires that the tax benefit of deferred tax assets be recorded to
the extent that realization is more likely than not. Valuation allowances were
provided in 1992, 1993 and 1994 since realization of the excess assets was
uncertain.

The Company completed a restructuring of its foreign operations in 1993. As
part of the restructuring, the Company changed its policy and began providing
United States taxes on unremitted foreign earnings. Earnings on which United
States taxes have been provided total $1,600,000 at December 31, 1994.

Net cash payments for income taxes during 1992, 1993 and 1994 were $100,000,
$54,000, $259,000, and $526,000 for the nine month period ended September 30,
1995, respectively.

The components of the provision (benefit) for deferred income taxes for the
year ended December 31, 1992 are as follows (in thousands):

<TABLE>
<CAPTION>
1992
----
<S> <C>
Depreciation.......................................................... $ (8)
Benefits not recorded due to net loss carryforward position........... 170
Distributions of former DISC.......................................... (29)
(Benefit) associated with restructuring charge........................ (98)
Inventory and other reserves.......................................... (79)
Timing difference in recognition of intercompany transfers............ (29)
Other................................................................. 22
----
$(51)
====
</TABLE>

6. PROVISION FOR RESTRUCTURING

The Company recorded in 1993 a provision for restructuring totalling
$288,000. The provision is composed of $319,000 related to retirement and
severance pay for U.S. employees who were terminated in March 1993 and a
$31,000 reduction of the 1992 restructuring provision related to downsizing
production capacity for power sources in Singapore. The Company recorded
restructuring charges of $1,392,000 in 1992. The 1992 amount represents a
$1,000,000 provision for closing the Company's Japanese subsidiary and a
charge of $392,000 related to closing the Company's UK and Irish operations,
downsizing of production capacity for power sources in Singapore and shifting
of production to Costa Rica. The charge was related principally to the
remaining lease obligations and associated costs at the UK and Singapore
facilities, severance liabilities and write-off of fixed assets. The provision
for closing the Japanese subsidiary related to estimated losses on disposal of
certain assets, severance pay, estimated expenses to be incurred in curtailing
operations and settling lease obligations related to the subsidiary's
facility.

F-15
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)

7. COMMITMENTS

The Company leases manufacturing and office facilities under noncancelable
operating lease agreements, expiring through 1998. Rental expense for 1992,
1993 and 1994 was $1,627,000, $1,234,000 and $1,241,000, respectively.

Future minimum rental payments under leases in effect at December 31, 1994
are: 1995--$785,000; 1996--$553,000; 1997--$312,000; 1998--$18,000; subsequent
to 1998--none. The lease on the Company's U.S. facility expired in May 1995.
In January 1995, the Company entered into an agreement to purchase the
facility as explained in Note 10 to the Consolidated Financial Statements.

The Company entered into an agreement in August 1993 to sub-lease
manufacturing and office space in its U.S. facility. Rental income for 1993
and 1994 was $41,000 and $108,000, respectively. Future income under the sub-
lease will be $38,000 in 1995.

8. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
1993 1994
------ ------
<S> <C> <C>
Payroll........................................................ $ 950 $1,287
Advanced payments.............................................. 341 60
Warranty....................................................... 453 302
Insurance payable.............................................. 12 121
Other.......................................................... 260 229
------ ------
$2,016 $1,999
====== ======
</TABLE>

The advanced payment balances relate principally to payments for
conditioning products which are included in the Company's backlog. Advanced
payments are refundable if the Company does not meet the term of the orders.
Revenues related to advanced payments are recognized when the products are
shipped.

9. RELATED PARTY TRANSACTIONS

The spouse of an employee of the Company has an ownership interest in a
company that provided computer software development and technical assistance
for certain products sold by the Company. The net expense accrued related to
these transactions, including royalties, amounted to $964,000, $454,000 and
$105,000 during 1992, 1993 and 1994, and $171,000 for the nine month period
ended September 30, 1995, respectively. The amounts payable to such Company
were $1,000 and $3,000 at December 31, 1993 and 1994 and $122,000 at September
30, 1995, respectively and the accounts are settled in the ordinary course of
business.

10. SUBSEQUENT EVENTS (UNAUDITED)

A lease on the Company's headquarters and manufacturing facility located in
Houston, Texas was scheduled to expire in May 1995. In March 1995, the Company
purchased the land and building for $3,300,000, of which $660,000 was paid in
cash. The $2,640,000 balance is payable in 180 equal monthly installments,
including interest at 9%, under a promissory note which is payable to the
seller. The note is collateralized by the land and building.

F-16
<PAGE>

RELIABILITY INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1994

(INFORMATION AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994 AND 1995 IS UNAUDITED)

Long-term debt at September 30, 1995 consisted of the following:

<TABLE>
<CAPTION>
1995
--------------
(IN THOUSANDS)
<S> <C>
Mortgage payable; due in monthly installments of $26,777,
including interest at 9%, beginning May 1, 1995........... $2,597
Less current maturities.................................... 91
------
Long-term debt due after one year........................ $2,506
======
</TABLE>

A subsidiary of the Company leased a manufacturing facility in San Jose,
Costa Rica. In October 1995, the subsidiary purchased the land and building
for a cash price of $810,000.

The Company entered into an agreement on October 10, 1995 to purchase land
and a building in North Carolina. The purchase price is $1,850,000 payable in
cash, and the Company projects that improvements totaling $800,000 will be
made to the facility. The Durham, North Carolina services facility will occupy
the new facility when the improvements are completed.

F-17
<PAGE>

INNOVATION LOADERS/UNLOADERS provide an automated
means for loading and unloading a variety of
device types in and out of burn-in boards. They
[Photo appears here] are microprocessor controlled, can be used in
small and large quantity applications, and
increase the realiability and speed of device
handling. Some models can be integrated into
Reliability's RELNET networking system.

Reliability manufactures DC-DC
converters in various configurations.
By using small DC-DC converters,
electronic equipment can operate from [Photo appears here]
a single output power supply yet provide
different voltages for different
components.

Reliability provides burn-in and testing services
in a dedicated service facility. This enables
customers to outsource burn-in and test services
[Photo appears here] performed to their exact requirements and, at the
same time, reduce their overhead and capital
expenses related to maintaining a burn-in
operation on site.

<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES TO WHICH IT RELATES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 9
Capitalization........................................................... 10
Price Range of Common Stock and Dividend Policy.......................... 10
Selected Consolidated Financial Data..................................... 11
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 12
Business................................................................. 18
Management............................................................... 25
Principal and Selling Stockholders....................................... 28
Description of Capital Stock............................................. 29
Underwriting............................................................. 30
Legal Matters............................................................ 31
Experts.................................................................. 31
Available Information.................................................... 31
Index to Consolidated Financial Statements............................... F-1
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

2,000,000 SHARES

[LOGO]

COMMON STOCK

----------------

PROSPECTUS

----------------

SOUTHCOAST CAPITAL
CORPORATION

JOSEPHTHAL LYON & ROSS
INCORPORATED

, 1995

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meanings assigned to them in the Prospectus which
forms a part of this Registration Statement.

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses payable by Reliability Incorporated in connection
with the issuance and distribution of the Common Stock to be registered, other
than underwriting discounts and commissions, are as follows:

<TABLE>
<S> <C>
Securities Act registration fee................................. $ 9,072
NASD filing fee................................................. 2,944
Blue Sky qualification fees and expenses........................ 11,000
Printing costs.................................................. 35,000
Legal fees and expenses......................................... 100,000
Accounting fees and expenses.................................... 25,000
Miscellaneous................................................... 6,984
--------
TOTAL......................................................... $190,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article 2.02-1 of the Texas Business Corporation Act provides:

(1) A corporation may indemnify any officer or director from and against
any judgments, penalties, fines, settlements, and reasonable expenses
actually incurred by him in an action, suit, investigation or other
proceeding to which he is, was, or is threatened to be a party; provided
that it is determined by the Board of Directors, a committee thereof,
special legal counsel, or a majority of the stockholders that such officer
or director: (a) conducted himself in good faith; (b) (i) in the case of
his conduct as a director of the corporation, reasonably believed that his
conduct was in the best interest of the corporation or (ii) in all other
cases, that his conduct was at least not opposed to the corporation's
interest; and (c) in a criminal case, had no reasonable cause to believe
his conduct was unlawful. Such indemnity is limited to the reasonable
expenses actually incurred in matters as to which the officer or director
is found liable to the corporation or is found liable on the basis that a
personal benefit was improperly received by him. No indemnification is
permitted with respect to any proceeding in which the officer or director
is found liable for willful or intentional misconduct in the performance of
his duty to the corporation.

(2) A corporation shall indemnify an officer or director against
reasonable expenses incurred by him in connection with an action, suit,
investigation, or other proceeding to which he is, was, or was threatened
to be a party if he has been wholly successful in its defense.

(3) A corporation may advance an officer or director the reasonable costs
of defending an action, suit, investigation or other proceeding in certain
cases.

(4) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would
have the power to indemnify him against such liability under the provisions
of this Article.

Section 6.10 of the bylaws of the Company provide that the Company shall
indemnify and hold harmless its officers and directors to the fullest extent
allowed by law.

II-1
<PAGE>

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

None

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.

(a) Exhibit Number and Description

<TABLE>
<C> <S>
1. Underwriting Agreement.
1.1 Form of Underwriting Agreement.**
2. Agreement and Plan of Consolidation.*
3. Certificate of Incorporation and bylaws.
3.1 Restated Articles of Incorporation of the Company, as amended
(incorporated by reference from 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 of the Company (incorporated by reference
from Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.)
3.3 Amendment to Amended and Restated Bylaws of the Company, effective
October 16, 1995.
4. Instruments defining the rights of security holders, including
indentures.
4.1 Specimen stock certificate.**
5. Opinion re legality.
5.1 Form of opinion of Butler & Binion, L.L.P.**
6. Opinion re discount on capital shares.*
7. Opinion re liquidation preference.*
8. Opinion re tax matters.*
9. Voting trust agreement.*
10. Material contracts.*
11. Statement re computation of per share earnings.*
12. Statement re computation of ratios.*
14. Material foreign patents.*
15. Letter re unaudited interim financial information.*
16. Letter re change in certifying accountant.*
21. Subsidiaries of the registrant.
21.1 Subsidiaries of the Company (incorporated by reference from Exhibit 21 to
the Company's Annual Report on Form 10-K for the year ended December 31,
1994).
23. Consents of experts and counsel.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Butler & Binion, L.L.P. (included in their opinion filed as
Exhibit 5.1).**
24. Power of attorney (contained on the signature page of this Registration
Statement).
25. Statement of Eligibility of Trustee.*
26. Invitation for Competitive Bids.*
27. Financial Data Schedule.
28. Information from reports furnished to state insurance regulatory
authorities.*
99. Additional exhibits.*
</TABLE>
- --------
* Inapplicable to this filing
** To be filed by amendment

II-2
<PAGE>

(b) Financial Statement Schedules

The following supplemental schedules can be found on the indicated page of
the Registration Statement.

<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
Supplementary financial information:
Quarterly results of operations (unaudited)......................... S-1
Schedules for each of the three years in the period ended December 31,
1994:
II--Valuation and qualifying accounts and reserves.................. S-2
</TABLE>

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.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that claims for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.

The Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS
ON OCTOBER 25, 1995.

Reliability Incorporated

/s/ Larry L. Edwards
By: _________________________________
Larry L. Edwards
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Larry L. Edwards and Max T. Langley and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including amendments that
register additional securities of the same class to be declared effective in
accordance with Rule 462(b) promulgated under the Securities Act of 1933 and
post-effective amendments) to this Registration Statement and any new
Registration Statement that registers additional securities in accordance with
said Rule 462, and to file the same, with all exhibits hereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.

NAME TITLE DATE

/s/ Larry L. Edwards President, Chief October 25,
- ------------------------------------- Executive Officer, 1995
LARRY L. EDWARDS and Director
(Principal Executive
and Operating Officer)

/s/ Max T. Langley Senior Vice President, October 25,
- ------------------------------------- Chief Financial 1995
MAX T. LANGLEY Officer (Principal
Accounting Officer)

/s/ W. L. Hampton Director October 25,
- ------------------------------------- 1995
W. L. HAMPTON

/s/ Everett Hanlon Director October 25,
- ------------------------------------- 1995
EVERETT HANLON

/s/ John R. Howard Director October 25,
- ------------------------------------- 1995
JOHN R. HOWARD

/s/ Thomas L. Langford Director October 25,
- ------------------------------------- 1995
THOMAS L. LANGFORD

/s/ A. C. Lederer, Jr. Director October 25,
- ------------------------------------- 1995
A. C. LEDERER, JR.

II-4
<PAGE>

RELIABILITY INCORPORATED

SUPPLEMENTAL FINANCIAL INFORMATION

QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1993
Net sales.............................. $6,752 $6,540 $ 7,239 $6,491
Gross profit........................... 2,585 2,672 3,417 2,943
Net income (loss)...................... (545)(1) 848 1,198 868(2)
Net income (loss) per share............ (.13) .20 .28 .21
1994
Net sales.............................. $5,225 $6,680 $ 7,141 $4,381
Gross profit........................... 2,515 3,337 3,053 1,785
Net income............................. 541 1,096 991 17
Net income per share................... .13 .26 .23 .00
1995
Net sales.............................. $4,093 $5,767 $11,286
Gross profit........................... 1,644 2,945 5,929
Net income (loss)...................... (472) 527 1,916
Net income (loss) per share............ (.11) .12 .45
</TABLE>
- --------
(1) The net loss for the first quarter of 1993 includes a $319,000 provision
for restructuring of U.S. operations.
(2) The net income for the fourth quarter of 1993 is increased by a $31,000
reduction in cost associated with restructuring of operations in Asia.

S-1
<PAGE>

RELIABILITY INCORPORATED

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1992 1993 1994 1995
------ ------ ----- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Inventory reserves at beginning of year... $ 753 $1,092 $ 603 $630
Additions charged to costs and expenses... 636 262 180 155
Amounts charged to reserve................ (297) (751) (153) (3)
------ ------ ----- ----
Inventory reserves at end of year......... $1,092 $ 603 $ 630 $782
====== ====== ===== ====
</TABLE>

S-2

<PAGE>

EXHIBIT 3.3

AMENDMENT TO AMENDED AND RESTATED
BYLAWS OF RELIABILITY INCORPORATED
EFFECTIVE OCTOBER 16, 1995

NOW, THEREFORE, BE IT RESOLVED, that the second sentence of Section 4.1 of
the bylaws of the company is hereby amended in its entirety to read as follows:

The board of directors shall consist of six members.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our Firm under the caption "Experts" and to
the use of our report dated February 10, 1995, in the Registration Statement
(Form-S-1) and related Prospectus of Reliability Incorporated for the
registration of 2,300,000 shares of its Common Stock. We also consent to the
addition of Financial Statement Schedule II to the financial statements
covered by our report.

Our audits also included Financial Statement Schedule II of Reliability
Incorporated. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.

Ernst & Young LLP

Houston, Texas
October 24, 1995

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM S-1
OCTOBER 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,879
<SECURITIES> 0
<RECEIVABLES> 7,116
<ALLOWANCES> 0
<INVENTORY> 5,525
<CURRENT-ASSETS> 15,388
<PP&E> 18,342
<DEPRECIATION> 12,868
<TOTAL-ASSETS> 20,931
<CURRENT-LIABILITIES> 5,555
<BONDS> 0
<COMMON> 5,926
0
0
<OTHER-SE> 6,804
<TOTAL-LIABILITY-AND-EQUITY> 20,931
<SALES> 21,146
<TOTAL-REVENUES> 21,146
<CGS> 10,628
<TOTAL-COSTS> 10,628
<OTHER-EXPENSES> 7,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 2,880
<INCOME-TAX> 909
<INCOME-CONTINUING> 1,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,971
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46

</TABLE>