<PAGE>

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                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON DC   20549
                                 ------------------


                                      FORM 10-Q
                                                 
(MARK ONE)
              [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934
                                           
                  For the quarterly period ended September 27, 1997
                                           
                                          OR
                                           
              [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934
                      For the transition period from ___ to ___
                                           
                           Commission File Number  0-19640
                        ---------------------------------------
                                           
                                           
                                        RETIX
                (Exact name of Registrant as specified in its charter)
                                                 
         
                   CALIFORNIA                            95-3948704
         (State or other jurisdiction of              (I.R.S. Employer  
        incorporation or organization)             Identification Number)
         
         
                               4640 ADMIRALTY WAY, #600
                          MARINA DEL REY, CALIFORNIA  90292
                       (Address of principal executive offices)
         
          Registrant's telephone number, including area code: (310) 828-3400
         
         
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
         
                                  YES X   NO   
                                     ---    ---
         
As of November 4, 1997 there were 22,663,701 shares of common stock outstanding.
         
         
Total number of sequential pages: 12
                                 ----

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


                                          1
<PAGE>

                            PART I.  FINANCIAL INFORMATION
    
ITEM 1.  FINANCIAL STATEMENTS 
                                        RETIX
                             CONSOLIDATED BALANCE SHEETS
                                    (IN THOUSANDS)

                                        ASSETS
<TABLE>
<CAPTION>
                                                                     SEPTEMBER 30,   DECEMBER 31,
                                                                         1997           1996  
                                                                     ------------   -------------
                                                                     (unaudited)
<S>                                                                   <C>            <C>       
Current assets:
    Cash and short-term investments . . . . . . . . . . . . . . . .    $10,179         $16,696
    Trade accounts receivable (net of allowances of  $1,480 as
      of September 30, 1997 and $1,543 as of December 31, 1996) . .      3,250           5,161
    Inventories . . . . . . . . . . . . . . . . . . . . . . . . . .      1,370           1,744
    Prepaid expenses and other current assets . . . . . . . . . . .        978           1,566
                                                                        --------       --------

Total current assets. . . . . . . . . . . . . . . . . . . . . . . .     15,777          25,167

Property and equipment, net . . . . . . . . . . . . . . . . . . . .      1,098           1,252
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . .      1,095           1,654
                                                                        --------       --------
                                                                        $17,970         $28,073
                                                                        --------       --------
                                                                        --------       --------

                  LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable. . . . . . . . . . . . . . . . . . . . . . . .    $ 1,675         $ 2,138
    Accrued wages and related liabilities . . . . . . . . . . . . .      1,086           1,282
    Accrued restructuring expenses. . . . . . . . . . . . . . . . .        993           1,223
    Other accrued liabilities . . . . . . . . . . . . . . . . . . .      3,512           4,310
    Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . .        521           1,242
                                                                        --------       --------

        Total current liabilities . . . . . . . . . . . . . . . . .      7,787          10,195

Long-term obligations, less current portion . . . . . . . . . . . .         84             276
                                                                        --------       --------

        Total liabilities . . . . . . . . . . . . . . . . . . . . .      7,871          10,471
                                                                        --------       --------

Shareholders' equity:
    Preferred stock, par value $.01, 2,000,000 shares authorized;
       none issued and outstanding
    Common stock, par value $.01, 50,000,000 shares authorized;
       shares issued and outstanding 1997, 22,663,701;
       1996, 22,597,427 . . . . . . . . . . . . . . . . . . . . . .        227             226
    Additional paid-in capital. . . . . . . . . . . . . . . . . . .     78,282          78,089
    Accumulated deficit . . . . . . . . . . . . . . . . . . . . . .    (61,882)        (53,850)
    Cumulative translation adjustment . . . . . . . . . . . . . . .     (1,986)         (1,961)
                                                                        --------       --------
         Total. . . . . . . . . . . . . . . . . . . . . . . . . . .     14,641          22,504
    Less notes receivable from issuance of common stock . . . . . .     (4,542)         (4,902)
                                                                        --------       --------

        Total shareholders' equity. . . . . . . . . . . . . . . . .     10,099          17,602
                                                                        --------       --------

                                                                        $17,970         $28,073
                                                                        --------       --------
                                                                        --------       --------
</TABLE>
 
See accompanying notes to consolidated financial statements


                                          2
<PAGE>

                                        RETIX
                        CONSOLIDATED STATEMENTS OF OPERATIONS
                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                     (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED            NINE MONTHS ENDED  
                                                                             SEPTEMBER 30,                 SEPTEMBER 30,   
                                                                         1997            1996           1997           1996 
                                                                       -------         -------        -------        -------
<S>                                                                     <C>             <C>            <C>            <C>
Revenues:
   Product                                                             $ 2,973         $ 6,925        $14,360        $20,496
   Service                                                               1,661           1,272          4,247          3,472
                                                                       -------         -------        -------        -------
       Net revenues                                                      4,634           8,197         18,607         23,968

Cost of revenues:
   Product                                                                 683           1,796          3,392          6,427
   Service                                                                 975             448          2,365          1,405
                                                                       -------         -------        -------        -------
   Total cost of revenues                                                1,658           2,244          5,757          7,832

Gross profit                                                             2,976           5,953         12,850         16,136
                                                                       -------         -------        -------        -------

Operating expenses:
   Research and development                                              1,972           2,703          7,604          7,829
   Sales and marketing                                                   2,737           2,966          9,433          8,325
   General and administrative.                                           1,030           1,238          3,934          3,608
                                                                       -------         -------        -------        -------
       Total                                                             5,739           6,907         20,971         19,762
                                                                       -------         -------        -------        -------
Loss from operations                                                    (2,763)           (954)        (8,121)        (3,626)
Other income                                                                59             362             89            674
                                                                       -------         -------        -------        -------

Loss before provision for income taxes                                  (2,704)           (592)        (8,032)        (2,952)
Provision for income taxes                                                 --              --             --             -- 
                                                                       -------         -------        -------        -------
Net loss                                                               $(2,704)        $  (592)       $(8,032)       $(2,952)
                                                                       -------         -------        -------        -------
                                                                       -------         -------        -------        -------


Net loss per common and
   common equivalent share                                              $(0.13)         $(0.03)        $(0.38)        $(0.15)
                                                                       -------         -------        -------        -------

Common and common equivalent shares used
   in computing per share amount                                        20,995          20,723         20,887         20,170
                                                                       -------         -------        -------        -------
</TABLE>


    See accompanying notes to consolidated financial statements.


                                          3
<PAGE>

                                        RETIX

                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    (in thousands)
                                     (unaudited)
    

<TABLE>
<CAPTION>
                                                                               NINE MONTHS ENDED SEPTEMBER 30,
                                                                                        1997          1996   
                                                                                       -------       ------- 
<S>                                                                                    <C>           <C>
                                                                                              
Cash flows from operating activities:                                                                        
   Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $(8,032)       $(2,952)
   Adjustments to reconcile net loss to net cash provided by (used for)
     operating activities:
        Depreciation and amortization. . . . . . . . . . . . . . . . . . . . .            978          1,208 
        Reserve for returns and bad debts. . . . . . . . . . . . . . . . . . .            (63)          (595)
        Changes in operating assets and liabilities  (Note 4). . . . . . . . .            336         (1,180)
                                                                                       -------        ------- 
     Net cash used for operating activities. . . . . . . . . . . . . . . . . .         (6,781)        (3,519)
                                                                                       -------        ------- 
                                                                                       -------        ------- 

Cash flows from investing activities:
   Increase (decrease)  in short-term investments. . . . . . . . . . . . . . .            813         (1,363)
   Additions to property and equipment . . . . . . . . . . . . . . . . . . . .           (509)          (324)
   Increase (decrease) in other assets . . . . . . . . . . . . . . . . . . . .            244           (566)
                                                                                       -------        ------- 
     Net cash provided by (used for) investing activities. . . . . . . . . . .            548         (2,253)
                                                                                       -------        ------- 

Cash flows from financing activities:
   Repayment of long term obligations. . . . . . . . . . . . . . . . . . . . .             --            (62)
   Proceeds from repayment of notes receivable . . . . . . . . . . . . . . . .            360             -- 
   Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . .            194          7,107 
                                                                                       -------        ------- 
     Net cash provided by financing activities . . . . . . . . . . . . . . . .            554          7,045 
                                                                                       -------        ------- 

Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . .            (25)             1 
                                                                                       -------        ------- 

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . .         (5,704)         1,274 

Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . .          8,948          5,518 
                                                                                       -------        ------- 

Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . .        $ 3,244        $ 6,792 
                                                                                       -------        ------- 
                                                                                       -------        ------- 
</TABLE>


             See accompanying notes to consolidated financial statements.


                                          4
<PAGE>

                                           
                                        RETIX
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                     (UNAUDITED)


1.  GENERAL

    The consolidated financial statements include the accounts of Retix and its
majority-owned subsidiaries (the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.  The interim
consolidated financial statements are unaudited.  In the opinion of management,
the interim financial statements include all adjustments, consisting of only
normal, recurring adjustments, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows.  The
Company's fiscal year ends on the Saturday nearest to December 31. For
simplicity of presentation, the Company has described the fiscal year ended
December 28, 1996 as December 31, 1996 and has described the thirteen weeks
ended September 28, 1996 and September 27, 1997 as the nine months ended
September 30, 1996 and 1997, respectively.

    It is suggested that these consolidated financial statements and the
accompanying notes be read in conjunction with the audited consolidated
financial statements and the accompanying notes for the year ended December 31,
1996 included in the Company's Annual Report.  The results of operations for the
nine month period ended September 30, 1997 are not necessarily indicative of
results that may be expected for the full year. 

2.  CASH AND SHORT-TERM INVESTMENTS

Cash and short term investments consist of the following (in thousands):
                                                September 30,     December 31,
                                                     1997              1996   
                                                    ---------        ---------
                                                  (unaudited)
         
     Cash and cash equivalents . . . . . . .         $ 3,244          $ 8,948 
     Short-term investments. . . . . . . . .           6,935            7,748 
                                                    ---------        ---------
                                                     $10,179          $16,696 
                                                    ---------        ---------
                                                    ---------        ---------
     
Cash equivalents consist of short term investments with original maturities of
three months or less.
    
3.  INVENTORIES
    
Inventories consist of the following (in thousands):
                                                September 30,     December 31,
                                                      1997             1996   
                                                    ---------        ---------
                                                  (unaudited)                 
     
     Raw materials and component parts . . . .       $   814          $   136 
     Work-in-process . . . . . . . . . . . . .           166            1,196 
     Finished goods    . . . . . . . . . . . .           390              412 
                                                    ---------        ---------
                                                     $ 1,370          $ 1,744 
                                                    ---------        ---------
                                                    ---------        ---------
    
    Work-in-process and finished goods inventories consist of material, direct
labor and overhead associated with the manufacturing process.


                                          5
<PAGE>

                                        RETIX
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                     (UNAUDITED)
    
    
    4.   STATEMENT OF CASH FLOWS
    
    Increases (decreases) in operating cash flows arising from changes in 
    operating assets and liabilities consist of the following     
    (in thousands):

<TABLE>
<CAPTION>
                                                                         Nine Months Ended September 30,
                                                                              1997           1996   
                                                                            ---------      ---------
<S>                                                                      <C>               <C>
    Trade accounts receivable  . . . . . . . . . . . . . . . . . .           $1,459        $  (128)
    Inventories  . . . . . . . . . . . . . . . . . . . . . . . . .              374            606 
    Prepaid expenses and other current assets. . . . . . . . . . .              588           (374)
    Accounts payable . . . . . . . . . . . . . . . . . . . . . . .             (463)           786 
    Accrued wages and related liabilities. . . . . . . . . . . . .             (196)           162 
    Accrued restructuring expenses . . . . . . . . . . . . . . . .             (230)        (2,609)
    Other accrued liabilities  . . . . . . . . . . . . . . . . . .           (1,252)           512 
    Deferred revenue . . . . . . . . . . . . . . . . . . . . . . .               56           (135)
                                                                            ---------      ---------
         Increase (decrease) in operating assets and liabilities .           $  336        $(1,180)
                                                                            ---------      ---------
                                                                            ---------      ---------
</TABLE>


    Financing and investing activities during the nine months ended September
30, 1997 which affected recognized assets or liabilities but that did not result
in cash receipts or cash payments were not significant.

    5.   PER SHARE INFORMATION
    
               Earnings per share is computed using the weighted average 
number of shares outstanding and dilutive common stock equivalents from the 
Company's stock option plans, calculated using the treasury stock method.  
Such common stock equivalents are excluded from the loss per share 
calculation as their effect is anti-dilutive for the periods ending 
September 30, 1997 and 1996.

               In February 1997, the Financial Accounting Standards Board 
issued Statement No. 128, "Earnings Per Share," which is required to be 
adopted on December 31, 1997.  At that time, the Company will be required to 
change the method currently used to compute earnings per share and to restate 
all prior periods.  Under the new requirements, primary earnings per share 
will be replaced by basic earnings per share from which the dilutive effect 
of stock options will be excluded.  The impact of adopting Statement No. 128 
will result in no change in primary loss per share for the periods ended 
September 30, 1997 and September 30, 1996 due to the anti-dilutive effect of 
common stock equivalents during these periods.
 
ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                         CONDITION AND RESULTS OF OPERATIONS

               "SAFE HARBOR" Statements under the Private Securities 
Litigation Reform Act of 1995:  Except for the historical information 
presented, the matters discussed in this Quarterly Report on Form 10-Q are 
forward looking statements that involve risks and uncertainties, including 
the timely deployment and success of new and enhanced TMN and ATM broadband 
access products, the impact of competitive products, the dependence on key 
partners and alliances, the length of the Company's sales cycle, size and 
timing of license fees closed during the quarter, the likely continued 
significant percentage of quarterly revenues recorded in the last month of 
the quarter which makes forecasting difficult and subject to a substantial 
risk of variance with actual results, the seasonal trends impacting the 
Company's business and the other risks detailed from time to time in the 
Company's public disclosure filings with the U.S. Securities and Exchange 
Commission (SEC).  Copies of the most recent Forms 10K and 10Q are available 
upon request from Retix's Investor Relations Department or from the Company's 
Internet World Wide Web page at "http://www.retix.com".

               The following discussion should be read in conjunction with 
the unaudited consolidated financial statements and accompanying notes, 
included in Part I -Item 1 of this Quarterly Report, and the audited 
consolidated financial statements and accompanying notes and Management's 
Discussion and Analysis of Financial Condition and Results of Operations for 
the year ended December 28, 1996 contained in the Company's Annual Report.


                                          6
<PAGE>
 
ITEM 2.             MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


RESULTS OF OPERATIONS

               NET REVENUES.  Net revenues decreased 43.5% to $4,634,000 for 
the three months ended September 30, 1997 and totaled $18,607,000 for the 
nine months ended September 30, 1997 as compared to $8,197,000 and 
$23,968,000 for the three and nine month periods ended September 30, 1996, 
respectively.  The decrease in revenues for the three month period for 1997 
is primarily due to the expected decline in legacy internetworking product 
shipments as Sonoma Systems focused on deployment of its first generation ATM 
broadband access products.  Additionally, in the Vertel subsidiary, revenues 
were impacted by delays in customers' purchasing decisions as well as a 
greater revenue falloff during the summer months than in prior years.

               Sales to third party customers outside of North America comprised
approximately 42.2% of net revenues for the nine months ended September 30, 1997
as compared to 45.3% for the same period in 1996.  The Company's high percentage
of sales to customers outside of North America has historically been due
primarily to strong international demand for its TMN and OSI technology software
and to relatively strong demand  for internetworking products within Europe and
Asia Pacific.

               Revenues generated by the Company's TMN-based and wireless 
data software solutions business decreased 23.0% to $3,694,000 and increased 
8.1% to $13,337,000 during the three and nine month periods ended September 
30, 1997, as compared to the same periods of 1996.  Software revenues for the 
nine month period for 1997 includes $1.9 million in final billings related to 
the discontinuance of the pACT-based two way paging messaging products.  
Software and related services revenues represent 79.7% and 71.7% of the 
Company's total revenues for three and nine months ended September 1997, 
respectively, as compared to 58.6% and 51.5% of net revenues for the same 
periods of 1996. Software revenues consist of network management and 
infrastructure solutions and associated services primarily from source 
license fees, royalties and services, including professional services, 
technical support and maintenance. Source license fees consist primarily of 
licenses of the Company's TMN-based and wireless data software solutions and 
development platforms and typically have accounted for a substantial portion 
of total revenue in each quarter. The decline in revenues during the third 
quarter of 1997 as compared to the same period of the prior year included a 
reduction in source license fees partially offset by continued increases in 
royalty and professional services revenue.  Although the relative impact of 
these factors cannot be quantified, the decline in source license revenues 
during the current quarter was attributable to increased time required by 
customers in evaluating the growing number of TMN-compliant development 
platforms and integrated telecommunications network management alternatives, 
including solutions based upon HP OpenView and Windows NT platforms, and a 
greater revenue falloff during the summer months than experienced in prior 
years.  The Company believes that the expanding initiatives of industry 
leaders to integrate TMN technology within telecom-based OSS network 
management product offerings reflects a broadening demand for TMN-compliant 
solutions.  Increases in revenue in the future will be primarily dependent 
upon the further acceptance of new technologies like digital cellular and 
ATM, the timely deployment and acceptance of standards-based solutions such 
as TMN and alliances with key partners to develop and market compelling 
solutions for the management of public telecommunications networks.

               Sales of internetworking products declined 72.3% to $940,000 
and 54.7% to $5,270,000 for the three and nine months ended September 30, 
1997, respectively, as compared to the same periods of 1996.  Internetworking 
revenues consist primarily of the Company's new high speed multi-service 
broadband access products that enable telecommunications service providers to 
extend broadband services to corporate users as well as sales of legacy 
internetworking multi-protocol router, local and remote LAN bridge and 
Ethernet switch products to private enterprises.  Broadband access product 
revenues increased 20.3% during the nine months ended September 30, 1997 as 
compared to the same period of 1996, and included the launch of the Company's 
first generation ATM broadband access product (Sonoma Access) in June 1997, 
while legacy product sales declined by 61.9% during the same period.  As the 
Company has previously reported, this decline in legacy product revenues is 
attributable to several factors, including the successful completion of 
certain large end-user programs in the United States, the closure of 
unprofitable sales channels and narrowing of internetworking product lines in 
1996.   

                                          7
<PAGE>

ITEM 2.             MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


               The Company's limited operating history with its newly 
launched broadband access products makes the prediction of future 
internetworking revenues difficult.  The Company believes increased revenues 
in the future will be primarily dependent on expansion of distribution 
channels as well as the success of enhancing its presence in the ATM WAN 
access equipment market through the development of its next generation of 
multi-service broadband access products.  As announced in October 1997, the 
Company has entered into an agreement with Newbridge Networks Corporation to 
resell Sonoma Access. The Company has planned additional product and feature 
introductions to its broadband access product-line during the fourth quarter 
of 1997, primarily targeted at the transparent multimedia services (TMS) and 
internet access markets, with subsequent product releases and volume 
production projected over the next few quarters.

               GROSS MARGIN.  Cost of revenues consists primarily of 
manufacturing costs (material, labor, packaging, documentation and overhead) 
and, to a lesser extent, royalties paid under licensing agreements and 
warranty costs.  Gross margin for the three and nine months ended September 
30, 1997 was 64.2% and 69.1%, respectively, of net revenues as compared to 
72.6% and 67.3% for the same periods of 1996. The decline in gross margin 
percentage during the current quarter of 1997 as compared to the same period 
of 1996 was due to changes in product mix, costs associated with new product 
introductions and current period decline in revenues.  Favorable trends in 
gross margins during the first nine months of 1997 include a shift in the 
Company's revenue mix to software-based products and services comprising 
71.7% of net revenues as compared to approximately 51.5% during the nine 
months ended September 30, 1996.  Balancing these factors was an increase in 
the mix of professional services and nonrecurring engineering project 
revenues, which have significantly lower gross margins than software 
products, to 22.8% of the Company's net revenues during the nine months ended 
September 30, 1997 as compared to 14.5% during the same period of 1996.  The 
Company anticipates continued increases in professional services and 
nonrecurring engineering project revenues as well as additional pricing 
pressures in the internetworking product areas. Although the Company is 
responding with a shift to outsourced manufacturing production and achieved 
significant product costing efficiencies in the design of its newly launched 
ATM broadband access products as well as implemented changes to pricing 
structures and distribution strategies within its software platforms and 
professional services businesses, margins may fluctuate and could decline in 
future periods.
 
               RESEARCH AND DEVELOPMENT.  The Company continues to make 
significant investments in research and development to develop its new line 
of ATM WAN access products, to expand its offering of TMN and wireless data 
solutions and to continue sustaining support of its product offerings.  The 
major components of research and development expenses are engineering 
salaries, employee benefits and associated overhead, purchased software, fees 
to outside contractors, the cost of facilities and depreciation of capital 
equipment.  For the three months ended September 30, 1997, the Company's 
research and development expenses decreased 27.0% to $1,972,000 from 
$2,703,000 for the same period in 1996.  For the nine months ended September 
30, 1997, the Company's research and development expenses decreased to 
$7,604,000 from $7,829,000 for the same period in 1996. As a percentage of 
revenue, research and development expenses were 42.6% and 40.9% for the three 
and nine months ended September 30, 1997, respectively, as compared to 33.0% 
and 32.7% for the same periods in 1996.  The decrease in research and 
development expense for the three and nine months ended September 30, 1997 as 
compared to the same period in 1996 is due to several factors, including a) 
increased amounts of customer-sponsored research and development projects; b)
increased spending on development of TMN-based solutions associated 
with technology development commitments with Hewlett Packard and on the 
Windows NT platform; c) declining scope of resources dedicated to sustaining 
efforts related to the Company's legacy internetworking products and d) 
resource reductions within the ATM WAN access product area coincident with 
completion of the core platform development and initial product launch during 
the second quarter of 1997.  The Company expects to continue to make 
significant investments in the development of new products and feature 
enhancement to existing product lines, although such expenses may fluctuate 
from quarter to quarter both in absolute dollars and as a percentage of 
revenue depending on the status of various development projects and the level 
of custom engineering services reallocated to costs of revenue.

                                          8
<PAGE>
 
ITEM 2.             MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


               SALES AND MARKETING.  Sales and marketing expenses decreased 
7.7% to $2,737,000 for the three months ended September 30, 1997 as compared 
to $2,966,000 for the same period in 1996.  For the nine months ended 
September 30, 1997, the Company's sales and marketing expenses increased to 
$9,433,000 from $8,325,000 for the same period in 1996. Sales and marketing 
expenses as a percentage of net revenues increased to 59.1% and 50.7% for the 
three and nine months ended September 30, 1997 as compared to 36.2% and 34.7% 
for the same period in 1996.  The decrease in absolute spending of sales and 
marketing expenses during the three months ended September 30, 1997 as 
compared to the same period in 1996 is due to reduced commission expenses on 
lower revenues and the stabilization of previously expanding sales activities 
at Vertel.  For the first nine months of 1997 as compared to the same period 
in 1996, the increase in absolute expenditures in sales and marketing 
reflected the significant level of activities aimed at increasing the 
industry-wide adoption rate of TMN-based solutions through activities such as 
the Global TMN Summit, co-sponsored by Vertel during the first quarter of 
1997, development of key strategic alliances, including the ten year 
marketing partnership with Hewlett Packard Company announced in September 
1997, and expansion of sales and marketing activities in support of 
distribution and system integrator channels in emerging international 
territories.  Additionally, costs associated with the introduction of the 
Company's ATM broadband access product, Sonoma Access, in June of 1997 and 
development of distribution relationships with major ATM equipment suppliers, 
including the reseller agreement with Newbridge Networks Corporation 
announced in October 1997, resulted in increased spending as compared to the 
same periods in the prior year.

               Sales and marketing expenses consist primarily of personnel 
and related costs relative to the Company's selling, sales support and 
marketing activities, including marketing programs such as trade shows and 
other promotional costs. The Company believes that substantial sales and 
marketing expenditures are essential to developing opportunities for revenue 
growth and to renewing the Company's competitive position.  Sales and 
marketing expenses are expected to continue to comprise a significant 
percentage of the Company's total expenses because of costs associated with 
supporting a worldwide organization of sales and service functions necessary 
to meet the needs of the Company's customer base and to respond to the 
opportunities in the rapidly growing telecommunications networking 
marketplace. The Company intends to continue its current model aimed at 
achieving broader market adoption of TMN and demand for broadband access 
products and, as such, sales and marketing expenses may continue to fluctuate 
from quarter to quarter both in absolute dollars and as a percentage of 
revenue.

               GENERAL AND ADMINISTRATIVE.  General and administrative 
expenses decreased 16.8% to $1,030,000 for the three months ended September 
30, 1997, as compared to $1,238,000 for the same period in 1996.  General and 
administrative expenses increased to $3,934,000 for the nine months ended 
September 30, 1997, as compared to $3,608,000 for the same period in 1996.  
General and administrative expenses as a percentage of net revenues increased 
to 22.2% and 21.1% for the three and nine months ended September 30, 1997, 
respectively, as compared to 15.1% for each of the same periods in 1996.  The 
decrease in absolute spending for general and administrative costs in the 
third quarter of 1997 as compared to the same period of 1996 is primarily due 
to consolidation of functions as a result of the combination of the Company's 
wireless data and certain international administrative operations with Vertel 
in June 1997.  The increase in absolute spending during the first nine months 
of 1997 is due to $499,000 in redeployment charges at Vertel in the first 
quarter of 1997 in support of its acceleration in development of integrated 
network management solutions.  The increase in general and administrative 
expenses as a percentage of revenues was primarily due to the decrease in 
revenues for the three and nine months ended September 30, 1997, as compared 
to the same periods in 1996.

               LOSS FROM OPERATIONS.  The Company incurred a loss from 
operations of $2,763,000 for the three months ended September 30, 1997 as 
compared to $954,000 for the same period of 1996 and a loss of $8,121,000 for 
the nine months ended September 30, 1997 as compared to $3,626,000 for the 
same period of 1996.  The year-to-date losses from operations are 
attributable to declines in revenues and gross profit, investments associated 
with the development and introduction of the Company's new ATM broadband 
access product line, and increases in Vertel's operating expenses during the 
first half of 1997 associated primarily with market development activities, 
all of which were offset by an increase in gross margin percentages 
associated with internetworking product shipments and final billings in the 
second quarter of 1997 related to the pACT network discontinuance.

                                          9
<PAGE>

ITEM 2.             MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


               There can be no assurance that the Company will be able to 
regain profitability or resume revenue growth on a quarterly or annual basis. 
 The Company's expense levels are based in part on its expectation of future 
revenues.  As a result of failure to meet these expectations, the Company has 
had to undertake several reorganizations to date.  Delays in new product 
introductions or product enhancements or the introduction of unsuccessful 
products could adversely affect the Company. If revenues are below 
expectations, results of operations may be adversely affected.

               OTHER INCOME.  For the three months ended September 30, 1997 
other income, consisting of interest income, net of interest expense, 
currency gains and losses, foreign tax withholdings and various other items 
decreased by $303,000, or 83.7% as compared to the same period in 1996 and by 
$585,000, or 86.8%, for the first nine months of 1997 as compared to the same 
period in 1996. The decrease is primarily due to the increases in foreign tax 
withholdings on international sales and decreases in interest income as a 
result of declining cash balances during the corresponding periods.

               PROVISION FOR INCOME TAXES.  The Company recorded no provision 
for income taxes on a pre-tax loss of $2,704,000 in the third quarter of 
1997.  A valuation allowance against the total amount of net deferred tax 
assets has been established.  As a result of the increase in the valuation 
allowance, the Company has net deferred tax assets of approximately $30 
million for which no benefit has been provided at September 30, 1997.  These 
net deferred tax assets will be realized to the extent that the Company 
operates profitably in the future during the respective carryforward periods.

LIQUIDITY AND CAPITAL RESOURCES

               At September 30, 1997 the Company's principal sources of 
liquidity consisted of $10,179,000 in cash and short-term investments. The 
Company's cash management system includes a sweep account which enables the 
Company to consolidate its operating cash into a central account daily and 
advance cash to the Company's subsidiaries to fund operating cash 
requirements.

               Cash and short-term investments decreased $6,517,000 or 39.0% 
during the nine months ended September 30, 1997 reflecting significant 
investments associated with the development and introduction of the Company's 
new ATM broadband access product line, Sonoma Access, and expansion of its 
position within the telecommunications network management marketplace.  The 
decrease in cash is attributable to the operating loss of $8,121,000 for 
the nine months ended September 1997 and was offset by, among other items, 
$1,459,000 in cash flow increases from the collection of accounts receivable 
in the same period.

               The Company believes that existing sources of liquidity, 
capital resources and funds from operations will satisfy the Company's 
anticipated cash needs through the end of the year.  From time to time, the 
Company may also consider the acquisition of, or evaluate investments in, 
certain products and businesses complementary to the Company's business.  Any 
such acquisition or investment may require additional capital resources.

                                          10
<PAGE>

                             PART II.  OTHER INFORMATION



ITEM 1.        LEGAL PROCEEDINGS

                 Neither the Company nor any of its subsidiaries is a party to,
nor is their property the subject of, any material pending legal proceedings.

ITEM 2.        CHANGES IN SECURITIES AND USE OF PROCEEDS

                 Not applicable.

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES

                 Not applicable.

ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                 None

ITEM 5.        OTHER INFORMATION

                 None.

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K

               (a)    EXHIBITS

                      10.50     Surrender of Lease between Cofton Irish 
                                Investments and Retix B.V., dated August
                                21, 1997.

                      10.51     Sub-Sublease Agreement between TSN, L.L.C. 
                                and Retix, dated August 22, 1997.

               (b)    REPORTS ON FORM 8-K

                      None.


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<PAGE>


                                      SIGNATURES


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


                                          RETIX
                                          (Registrant)



Date: November 10, 1997                   /S/ Steven M. Waszak
                                          ------------------------------
                                          Steven M. Waszak
                                          Vice President of Finance and 
                                          Administration and Chief Financial
                                          Officer
                                          (Principal Financial and Accounting
                                          Officer)


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