In the reliability algorithm based on the maximum-flow minimum-cut technique together with the decomposition principle, the generation of the state space for purposes of classification requires a large amount of memory. A state-space truncation algorithm which reduces the number of states while maintaining accuracy within specific limits is presented. The reliability algorithm is developed further to produce: (1) all possible loss-of-load levels and their associated probabilities, and (2) the system reliability indices and their sensitivities with respect to element capacities. This algorithm has been applied to a small test system, and to the IEEE reliability test system. >