<PAGE>

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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON D.C.   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 28, 1996

                                      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 Identification Number)
       incorporation or organization)

                               4640 ADMIRALTY WAY
                        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 11, 1996 there were 22,550,006 shares of Common Stock 
outstanding.

Total number of sequential pages:   14
                                   ----

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<PAGE>

                         PART I.  FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                                   RETIX
                        CONSOLIDATED BALANCE SHEETS
                              (in thousands)

                                  ASSETS

<TABLE>
<CAPTION>
                                                         SEPTEMBER 30,     DECEMBER 31,
                                                             1996              1995
                                                         -------------     ------------
                                                          (unaudited)
<S>                                                       <C>              <C>
Current assets:

  Cash and short-term investments . . . . . . . . . .        $17,588          $14,950
  Trade accounts receivable (net of allowances of
    $1,878 as of December 31, 1995 and $1,333 as of 
    September 30, 1996). . . . . . . . . . . . . . . .          6,167           5,445
  Inventories. . . . . . . . . . . . . . . . . . . . .          2,250           2,855
  Prepaid expenses and other current assets. . . . . .          2,104           1,730
                                                              -------         -------
Total current assets   . . . . . . . . . . . . . . . .         28,109          24,980
Property and equipment, net  . . . . . . . . . . . . .          2,586           3,073
Other assets . . . . . . . . . . . . . . . . . . . . .          1,513           1,345
                                                              -------         -------
                                                              $32,208         $29,398
                                                              -------         -------
                                                              -------         ------- 
                                                                                                                            
                              LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Current portion of long term obligations  . . . . .        $    --         $    54
   Accounts payable  . . . . . . . . . . . . . . . . .          2,121           1,336
   Accrued wages and related liabilities . . . . . . .          1,222           1,060
   Accrued restructuring expenses. . . . . . . . . . .          1,726           4,334
   Other accrued liabilities . . . . . . . . . . . . .          3,523           3,012
   Deferred revenue. . . . . . . . . . . . . . . . . .            923           1,058
                                                              -------         -------
       Total current liabilities . . . . . . . . . . .          9,515          10,854
Long-term obligations, less current portion  . . . . .          4,174           4,184
                                                              -------         -------
       Total liabilities . . . . . . . . . . . . . . .         13,689          15,038
                                                              -------         -------
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 
     1995, 18,052,582; 1996, 22,544,881 . . . . . . . .           226             181
   Additional paid-in capital . . . . . . . . . . . . .        77,785          65,821
   Accumulated deficit  . . . . . . . . . . . . . . . .       (52,960)        (50,009)
   Cumulative translation adjustment  . . . . . . . . .        (1,630)         (1,633)
                                                              -------         -------
         Total  . . . . . . . . . . . . . . . . . . . .        23,421          14,360
   Less notes receivable from issuance of 
     common stock . . . . . . . . . . . . . . . . . . .        (4,902)            --
                                                              -------         -------
         Total shareholders' equity . . . . . . . . . .        18,519          14,360
                                                              -------         -------
                                                              $32,208         $29,398
                                                              -------         -------
                                                              -------         -------
</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,
                                      ------------------       -----------------
                                      1996          1995       1996         1995
                                      ----          ----       ----         ----
<S>                                 <C>           <C>        <C>          <C> 
Revenues . . . . . . . . . . . .    $ 8,197       $ 7,509    $23,968      $31,162
Cost of revenues . . . . . . . .      2,244         3,726      7,832       14,113
                                    -------       -------    -------      -------
Gross profit . . . . . . . . . .      5,953         3,783     16,136       17,049
                                    -------       -------    -------      -------
Operating expenses:                                                                                                                
  Research and development . . .      2,703         3,719      7,829       10,398
  Sales and marketing. . . . . .      2,966         4,364      8,325       13,464
  General and administrative . .      1,238         1,841      3,608        4,663
                                    -------       -------    -------      -------
    Total  . . . . . . . . . . .      6,907         9,924     19,762       28,525
                                    -------       -------    -------      -------
Loss from operations . . . . . .       (954)       (6,141)    (3,626)     (11,476)
Other income, net  . . . . . . .        362           358        674          677
                                    -------       -------    -------      -------
Loss before provision for 
  income taxes  . . . . . . . . .      (592)       (5,783)    (2,952)     (10,799)
Provision for income taxes. . . .        --            --         --           --
                                    -------       -------    -------      -------
Net loss  . . . . . . . . . . . .   $  (592)      $(5,783)   $(2,952)    $(10,799)
                                    -------       -------    -------      -------
                                    -------       -------    -------      -------
Net loss per common and                                                                                                           
  common equivalent share . . . .   $ (0.03)      $ (0.32)   $ (0.15)     $ (0.61)
                                    -------       -------    -------      -------
Common and common equivalent 
  shares used in computing per 
  share amount  . . . . . . . . .    20,723        17,939     20,170       17,849
                                    -------       -------    -------      -------
</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,
                                               -------------------------------
                                                   1996           1995
                                                   ----           ----
<S>                                             <C>             <C>
Cash flows from operating activities:
  Net loss . . . . . . . . . . . . . . . . .     $(2,952)       $(10,799)
  Adjustments to reconcile net loss to 
    net cash provided by (used for) 
    operating activities:
      Depreciation and amortization . . . . .      1,208           3,147
      Reserve for returns and bad debts . . .       (595)           (112)
      Changes in operating assets and 
        liabilities  (Note 4) . . . . . . . .     (1,180)          3,963
                                                 -------         -------
      Net cash used for operating activities .    (3,519)         (3,801)
                                                 -------         -------

Cash flows from investing activities:
  Increase in short-term investments . . . . .    (1,363)           (158)
  Additions to property and equipment  . . . .      (324)         (1,588)
  Increase in other assets . . . . . . . . . .      (566)           (453)
                                                 -------         -------
    Net cash used for investing activities . .    (2,253)         (2,199)
                                                 -------         -------
Cash flows from financing activities: 
  Repayment of long term obligations . . . . .       (62)            (76)
  Proceeds from issuance of common stock . . .     7,107             959
                                                 -------         -------
    Net cash provided by financing activities .    7,045             883
                                                 -------         -------
Effect of exchange rate changes on cash . . . .        1             152
                                                 -------         -------
Net increase (decrease) in cash and 
  cash equivalents. . . . . . . . . . . . . . .    1,274          (4,965)
Cash and cash equivalents, beginning 
  of period . . . . . . . . . . . . . . . . . .    5,518          12,695
                                                 -------         -------
Cash and cash equivalents, end of period  . . .  $ 6,792          $7,730
                                                 -------         -------
                                                 -------         -------
</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 
wholly-owned subsidiaries (the "Company"), including the newly formed 
subsidiaries for the Company's internetworking business unit and wireless 
business unit as announced in the second quarter of 1996.  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 30, 1995 as December 31, 1995 and has described 
the thirteen weeks ended September 30, 1995 and September 28, 1996 as the 
three months ended September 30, 1995 and 1996, 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, 1995 included in the Company's Annual Report.  The results of operations
for the three and nine month periods ended September 30, 1996 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,
                                              1996             1995
                                              ----             ----
                                          (unaudited)

     Cash and cash equivalents . . . . .    $ 6,792          $ 5,518
     Short-term investments  . . . . . .     10,796            9,432
                                            -------          -------
                                            $17,588          $14,950
                                            -------          -------
                                            -------          -------

  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,
                                              1996             1995
                                              ----             ----
                                          (unaudited)


     Raw materials and component parts . .   $  263          $ 1,718
     Work-in-process . . . . . . . . . . .    1,237              491
     Finished goods  . . . . . . . . . . .      750              646
                                            -------          -------
                                            $ 2,250          $ 2,855
                                            -------          -------
                                            -------          -------


  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):

                                               NINE MONTHS ENDED SEPTEMBER 30,
                                               -------------------------------
                                                   1996           1995
                                                   ----           ----

  Trade accounts receivable  . . . . . . . .   $   (128)         $6,992
  Inventories  . . . . . . . . . . . . . . .        606            (460)
  Prepaid expenses and other current 
    assets . . . . . . . . . . . . . . . . .       (374)            294
  Accounts payable . . . . . . . . . . . . .        786            (309)
  Accrued wages and related liabilities  . .        162            (497)
  Accrued restructuring expenses . . . . . .     (2,609)             --
  Deferred revenue . . . . . . . . . . . . .       (135)            (45)
  Other accrued liabilities  . . . . . . . .        512          (2,012)
                                                -------          -------
    Increase (decrease) in operating 
      assets and liabilities . . . . . . . .    $(1,180)         $3,963
                                                -------          -------
                                                -------          -------

  Financing and investing activities during the nine months ended September
30, 1995 and 1996 which affected recognized assets or liabilities but that
did not result in cash receipts or cash payments were not significant, except
as noted in Note 5, Shareholders' Equity.

5. SHAREHOLDERS' EQUITY

  Effective January 30, 1996, Sierra Ventures V, L.P. ("Sierra"), a venture
capital firm, purchased 2,000,000 shares of the Company's Common Stock in a
private placement at $2.00 per share.  Additionally, Sierra was granted a
warrant to purchase an additional 2,000,000 shares of the Company's Common
Stock at prices ranging from $2.00 to $5.00 per share over the three year term
of the warrant.  Sierra's equity investment totaled $4.2 million and was
recorded in common stock and additional paid-in capital.

  Notes receivable from issuance of common sftock arose from the exercise of
stock options.  During the first quarter of 1996, the Board of Directors
approved the exercise of stock options held and outstanding by certain key
employees and consultants in exchange for promissory notes.  The common stock
issued upon such exercise of options is subject to repurchase by the Company
based upon continuation of the terms of employment or consultancy agreements,
with vesting and release from the Company's repurchase right on a cumulative
basis from original date of option grant at a rate of 25% one year after the
vesting commencement date and 1/48th of the shares subject to the original
option in equal monthly installments thereafter.  For purposes of computing
earnings per share, the common stock issued subject to notes receivable are
treated as options and are excluded from the calculation of earnings per share
because they are considered antidilutive.

                                       6

<PAGE>

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

    Except for the historical information contained in this Quarterly Report
on Form 10-Q, the matters discussed herein are forward-looking statements 
that are subject to certain risks and uncertainties that could cause the 
actual results to differ materially from those projected, including the risks 
detailed below and included from time to time in the Company's other SEC 
reports and press releases, copies of which are available from the Company 
upon request.  The Company assumes no obligation to update any 
forward-looking statements contained herein.

    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 31, 
1995 contained in the Company's Annual Report.

RESULTS OF OPERATIONS

    In response to the losses experienced over the past three years, the 
Company commenced a major reorganization during the fourth quarter of 1995 
with an emphasis on focusing resources toward leveraging identified areas of 
value within Retix's primary lines of business.  The reorganization included 
a significant restructuring of the Company's internetworking business unit, 
including staff reductions, consolidation within channels of distribution and 
abandonment of facilities, expansion in the Company's software businesses 
including the telecommunications management network (TMN) market and wireless 
data networking in narrowband PCS two-way messaging.  While substantial 
progress was made in support of the Company's development during the first 
nine months of 1996, ongoing efforts will be required to further strengthen 
operating results and capitalize on the values within the Company's 
businesses.

    Although year-over-year annual net revenues have declined in 1996 as 
compared to 1995, the Company has shown recovery from 1995 to the third 
quarter of 1996 as it achieved year-over-year quarterly revenue growth of 
9.2% and an improvement in gross margins from 50.4% to 67.3% during this 
period. Additionally, efficiencies gained from the Company's reorganization 
resulted in the reduction of recurring operating expenses by 30.4% to 
$6,907,000 in the third quarter of 1996 from $9,924,000 in the same period 
for 1995.  As a result of improving product margins, operating efficiencies 
and stabilized revenues, the Company's net loss was reduced 89.8% to 
$592,000, or $0.03 per share, for the three months ended September 30, 1996 
as compared to $5,783,000, or $0.32 per share, for the same period of 1995.  
The Company believes that the margin improvements noted in the first nine 
months of 1996, the operating expense reductions achieved as a result of the 
restructuring initiated in October 1995, and the $17,588,000 in cash and 
short-term investments as of September 30, 1996 provide financial support for 
the Company's ongoing operations.

    NET REVENUES.  Net revenues increased 9.2% to $8,198,000 for the three
months ended September 30, 1996 as compared to $7,509,000 for the same period
in 1995.  However, net revenues for the nine months ended September 30, 1996
decreased 23.1% to $23,968,000 from $31,162,000 for the same period in 1995.
The increase in revenues for the three month period ended September 30, 1996
reflects overall growth in the Company's software product offerings within its
TMN and wireless data networking businesses.  The decrease in revenues for the
nine month period reflects overall decreases in internetworking revenues
during the first six months of 1996 as compared to the same period in 1995.
Revenues generated by the Company's TMN software product lines increased 24.2%
to $3,767,000 and 18.7% to $10,376,000 during the three and nine month
periods, respectively, ended September 30, 1996 as compared to the same
periods in 1995.  Sales of internetworking products declined 20.7% to
$3,397,000 and 40.9% to $11,634,000, respectively, for the three and nine
months ended September 30, 1996 as compared to the same periods in 1995.
Revenues generated by the Company's wireless data products for the three
months ended September 30, 1996 increased 447% to $1,033,000 and decreased
28.4% to $1,958,000 for the nine months ended September 30, 1996, as compared
to the same periods during 1995.

                                       7
<PAGE>

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

    Demand for the Company's telecommunications management network (TMN) 
products sold through its subsidiary, Vertel, increased in the third quarter 
and first nine months of 1996 as compared to the corresponding three and nine 
month periods of 1995.  This trend is a result of an ongoing effort to 
increase Vertel's share of the emerging TMN market by providing embedded 
software, tools and management products for integration into 
telecommunications service providers' network management environments.  In 
support of this effort to expand market share, Vertel added several key new 
licensees and extensions of existing licenses for deployment of its TMN 
technology by telecommunications equipment manufacturers and software 
infrastructure providers during the third quarter. Vertel also announced 
joint product development efforts with Tandem and Versant Object Technologies 
during the third quarter of 1996.  Sales of TMN-based products and services 
accounted for 46.0% and 43.3%, respectively, of Vertel's net revenues during 
the three and nine months ended September 30, 1996.  The emerging demand for 
TMN software solutions is driven by telecommunication network deregulation 
and the demand for increased network bandwidth.  Vertel's current products 
offer network management software with built-in TMN support to standardize 
the interface between carrier network management systems and devices within a 
service provider's network.  Increased Vertel revenues will be primarily 
dependent on market acceptance of TMN architecture specifications in carrier 
network management environments and Vertel's ability to form strategic 
relationships with key service providers and supporting equipment 
manufacturers.

    Wireless data product revenues for the third quarter of 1996 totalled 
$1,033,000 and reflect increasing sales compared to both the immediately 
preceding quarter and the same period in 1995.  The increase in wireless data 
product revenues during the third quarter of 1996 was attributable to the 
development of mobile data and messaging software products which provide 
consumers the ability to transfer data over wireless markets.  Previously, 
the Company focused on contracts which generated nonrecurring engineering 
project revenues during 1995.  The decrease in revenues during the first nine 
months of 1996 as compared to 1995 was the result of a significant 
nonrecurring sale of a source license from the Company's CDPD product line in 
the first half of 1995.  This sale marked the completion of a significant 
nonrecurring engineering project contract.  During 1996, the Company has 
announced enhancements to its wireless data technology for narrowband PCS 
based software applications, including network management system applications 
which enable wireless communications providers to expand service offerings 
within the two-way messaging marketplace.

    Software product revenues, including from TMN and wireless data products, 
may continue to fluctuate from period to period due to nonrecurring software 
license agreements or royalties derived from these agreements or certain 
government contracts in addition to the size and timing of license fees 
closed during the quarter.  Additionally, there can be no assurance that 
software product markets will attain broad acceptance or generate long-term 
growth opportunities in line with the Company's past performance or future 
objectives.

    Internetworking revenues are primarily comprised of sales of multi-protocol
routers, local and remote LAN bridges, Ethernet switch and broadband 
products. As a consequence of declining revenues, the Company initiated a 
significant restructuring of its internetworking business unit in the fourth 
quarter of 1995.  Such activities included staff reductions focused primarily 
within the business unit's selling, general and administrative functions and 
a consolidation within its channels of distribution in an effort to leverage 
field selling activities and increase return on sales.

    Sales of internetworking products declined 20.7% to $3,397,000 and 40.9% to
$11,634,000, respectively, during the three and nine months ended September
30, 1996 as compared to the same periods of 1995. Router, bridge and Ethernet
switch product revenues declined 43.6%, 38.1% and 19.1%, respectively, during
the nine months ended September 30, 1996 as compared to the same period of
1995.  The declines noted in internetworking product sales reflect the
decrease in demand for internetworking products within Europe and Asia Pacific
as products have matured in the marketplace.  During the third quarter of
1996, the Company released the 7223 and 7224 ISDN routers and an ISDN card for
the Company's 7500 series routers for the European market.

                                       8

<PAGE>
ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                   CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
    There can be no assurance that the Company's internetworking products will 
attain broad acceptance or generate long term growth opportunities.  The 
Company plans to leverage its technologies in routing combined with bridging 
and Ethernet switching to develop integrated solutions which capitalize on 
industry available components and are standards-based, upgradable and 
expandable.  As the Company transitions its internetworking business to this 
new product-line, certain of its legacy products and long-term product 
programs are likely to enter end-of-life.  There can be no assurance as to 
the success of the Company's new intenetworking products or their ability to 
offset maturation of legacy internetworking products with increased revenues. 
Furthermore, greater marketing and distribution resources of larger 
competitors, increasing price pressures and delays in releasing new products 
and features have affected the Company's ability to gain or retain market 
share in previous periods.  Increased internetworking revenues will be 
primarily dependent on the success of the Company with regard to enhancing 
its presence in the rapidly evolving networking markets through the 
development of efficient channels of product distribution and innovative 
products.

    Sales to third party customers outside of North America comprised
approximately 45.3% of net revenues for the nine months ended September 30,
1996 as compared to 54.3% for the same period in 1995.  The Company's high
percentage of sales to customers outside of North America has historically
been due primarily to relatively strong demand for internetworking products
within Europe and Asia Pacific and to relatively strong international demand
for its TMN and OSI technology software.

    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 increased to 72.6% and 67.3% of net revenues for the three and nine
months ended September 30, 1996, respectively, from 50.4% and 54.7% for the
same periods in 1995.  The increase in gross margin was attributable primarily
to a shift in revenue mix toward software-based products which have
significantly higher gross margins than engineering services or
internetworking products.  Software product revenues accounted for 58.6% and
51.5% of total revenues for the three and nine months ended September 30,
1996, respectively, as compared to 42.9% and 36.8% for the same periods in
1995.  In addition, the increase in gross margin was attributable to further
progress in the reduction in excess capacity and associated costs of the
Company's manufacturing operations.  The Company is transitioning to an
outsourcing strategy for the manufacture of its products during 1996.  Failure
to complete this transition on a timely basis or any difficulties experienced
by the Company's manufacturing partners, on which the  Company could become
solely dependent for the supply of its products,  could adversely affect the
Company's operating results.  The Company anticipates continued pricing
pressures within its internetworking product areas, and while the Company is
responding with reductions in manufacturing overhead and product costs as well
as changes to pricing structures and distribution strategies, margins may
decline in future periods.

    RESEARCH AND DEVELOPMENT.  The Company continues to make significant
investments in research and development to expand its expertise in TMN and
wireless data technologies, to develop new internetworking products and to
support its product offerings.  The major components of research and
development expenses are engineering salaries, employee benefits and
associated overhead.  For the three months ended September 30, 1996, the
Company's research and development expenses decreased 27.3% to $2,703,000 as
compared to $3,719,000 for the same period in 1995.  For the nine months ended
September 30, 1996, the Company's research and development expenses decreased
24.7% to $7,829,000 as compared to $10,398,000 for the same period in 1995.
The decrease in research and development expense for the three and nine months
ended September 30, 1996 as compared to the same periods in 1995 is primarily
due to reductions in spending within the Company's internetworking business
unit due to consolidation of facilities and realignment to more efficient
staffing levels as a result of the restructuring activities announced and
executed in late 1995. This decrease was offset by a reduction in customer
reimbursements for engineering costs in connection with nonrecurring
engineering projects.  As a percentage of revenue, research and development
expenses were 33.0% and 32.7% for the three and nine months ended September
30, 1996, respectively, as compared to 49.5% and 33.4% for the same period in
1995. The Company expects to continue significant investments in the
development of new products and feature enhancements to existing product
lines.

                                       9
<PAGE>

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

    The markets for the Company's products are characterized by rapidly 
changing technology and frequent new product introductions.  Accordingly, the 
Company believes that its future success will depend on its ability to 
enhance its existing products and to develop and introduce in a timely 
fashion new products that achieve market acceptance.  Delays in new product 
introductions or product enhancements, or the introduction of products that 
are not successful in the market, could adversely affect the Company.  The 
Company's revenues are dependent on, among other things, the acceptance of 
these products by customers, and no assurance concerning their acceptance can 
be given.

    SALES AND MARKETING.  Sales and marketing expenses decreased 32.0% to 
$2,966,000 for the three months ended September 30, 1996 as compared to 
$4,364,000 for the same period in 1995.  For the nine months ended September 
30, 1996, sales and marketing expenses decreased 38.2% to $8,325,000 as 
compared to $13,464,000 for the same period in 1995.  The significant 
decrease in the absolute spending for sales and marketing and the decrease of 
such expenses as a percentage of revenue in the third quarter of 1996 as 
compared to the same period of 1995 reflect efforts to restructure the 
Company's internetworking sales and marketing activities, including the 
consolidation of field sales offices, streamlining of sales organizations and 
elimination of other nonperforming selling infrastructure costs worldwide.  
Partially offsetting these efficiencies was the increased staffing of sales 
and marketing functions by Vertel during the three months ended September 30, 
1996.  Sales and marketing expenses as a percentage of net revenues decreased 
to 36.2% and 34.7% for the three and nine months ended September 30, 1996, 
respectively, as compared to 58.1% and 43.2% for the same periods in 1995.

    Sales and marketing expenses consist primarily of personnel and related
costs relative to the 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 the 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 management and networking markets.

    GENERAL AND ADMINISTRATIVE.  General and administrative expenses decreased 
32.8% to $1,238,000 for the three months ended September 30, 1996 as compared 
to $1,841,000 for the same period in 1995, and decreased 22.6% to $3,608,000 
for the nine months ended September 30, 1996 as compared to $4,663,000 for 
the same period in 1995.  The decrease in absolute spending for general and 
administrative services in the first nine months of 1996 as compared to the 
same period of 1995 is primarily attributable to the net effect of headcount 
reductions and elimination of non-critical infrastructure costs worldwide in 
connection with restructuring efforts executed in late 1995 related to the 
Company's internetworking business unit, partially offset by increases in 
spending by the Company's Vertel and Wireless subsidiaries. General and 
administrative expenses as a percentage of net revenues decreased to 15.1% 
for the three months ended September 30, 1996 as compared to 24.5% for the 
same period of 1995.  General and administrative expenses remained relatively 
unchanged at 15.1% of net revenues for the nine months ended September 30, 
1996 as compared to the year earlier period despite a 23.1% decrease in net 
revenues.

    LOSS FROM OPERATIONS.  The Company's loss from operations decreased 84.5%
to $954,000 for the three months ended September 30, 1996 as compared to 
$6,141,000 for the same period in 1995. Additionally, the Company's loss from 
operations decreased 68.4% to $3,626,000 for the nine months ended September 
30, 1996 as compared to $11,476,000 for the same period in 1995 despite a 
23.1% decline in revenues.  The reductions achieved in losses from operations 
were due to an increase in gross margin percentages and significant decreases 
in operating expenses as a result of the restructuring activities within the 
Company's internetworking business unit.  Total operating expenses decreased 
30.4% to $6,907,000 for the three months ended September 30, 1996 as compared 
to $9,924,000 for the same period in 1995, and decreased 30.7% to $19,762,000 
for the nine months ended September 30, 1996 as compared to $28,525,000 for 
the same period in 1995.

                                      10

<PAGE>

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

    In 1994, 1995 and the first nine months of 1996, the Company experienced
operating losses and a decrease in revenues from the results of the prior 
year.  There can be no assurance that the Company will be able to regain 
profitability or resume or maintain 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 in the past, including 
in 1995.  Delays in new product introductions or product enhancements or the 
introduction of products that are not successful in the market 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, 1996 other income,
consisting of interest income, net of interest expense, currency gains and
losses, investment income and various other items remained relatively
unchanged at $362,000 as compared to $358,000 of the same period of 1995.  For
the nine months ended September 30, 1996, other income remained relatively
unchanged at $674,000 as compared to $677,000 for the same period of 1995.

    PROVISION FOR INCOME TAXES.  The Company recorded no provision for income
taxes on a loss before income taxes of $592,000 in the third quarter of 1996
and $2,951,000 for the first nine months of 1996.  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 $23,000,000 for which no benefit has been
provided at September 30, 1996.  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, 1996 the Company's principal sources of liquidity consisted
of $17,588,000 in cash, cash equivalents 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 its subsidiaries to fund operating cash requirements.

    Cash, cash equivalents and short-term investments increased 17.6%, or
$2,638,000, during the nine months ended September 30, 1996.  The increase in
cash is primarily attributable to a $7,107,000 capital infusion from a private
placement of the Company's Common Stock and the exercise of stock options by
employees and consultants during the nine months ended September 30, 1996.

    The use of cash for operations was attributable primarily to the loss from
operations of $2,952,000 for the nine months ended September 30, 1996.  The 
largest component of the use of cash from operations was $2,609,000 in 
payments for restructuring activities within the internetworking business 
unit.  The restructuring activities, announced in October 1995, called for 
streamlining of specific sales channels, territories and product lines, and 
included costs of elimination of excess manufacturing capacity, inventory 
reductions related to product line and distribution streamlining, facility 
and asset consolidation, employee severance pay and other related charges.  
The restructuring plan entailed work force reductions of 108 employees within 
manufacturing, engineering, sales, marketing and administration, as well as 
the disposition of various sales, service and engineering facilities.  As of 
September 30, 1996, $4,458,000 of the restructuring costs had been paid and 
substantially all reserves related to the write down of inventories and fixed 
assets have been utilized.  Also, as of September 30, 1996, 103 positions had 
been eliminated while the remaining reserves relating to severance totaled 
$366,000.  Facility reduction costs include the lease cost of vacated space 
for the estimated period of time required to sublet the facilities.  Of the 
$1,720,000 in facility related reserves remaining as of September 30, 1996, 
$520,000 are classified as a short term obligation.  The Company is 
finalizing negotiations to sublease or cancel all remaining lease terms for 
affected facilities.  Other restructuring reserves remaining as of September 
30, 1996 totaled $840,000 and primarily related to costs associated with 
customer returns, consolidation of repair depots and warranties.  In the 
fourth quarter of 1996, the Company plans to analyze the remaining accruals 
in order to determine disposition of such reserves.

                                      11

<PAGE>

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

    The Company believes that the quarterly cost reductions gained as a result
of the 1995 restructuring and the $7,107,000 capital infusion resulting from
the private placement of the Company's Common Stock and exercise of stock
options during the nine months ended September 30, 1996 along with existing
sources of liquidity, capital resources and funds from operations will satisfy
the Company's anticipated cash needs for at least the next twelve months.
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.

                                      12

<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

       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

       None.

  (b)  REPORTS ON FORM 8-K

       None.

                                      13

<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 12, 1996              /S/  Steven M. Waszak
                                      ---------------------------------
                                      Steven M. Waszak
                                      Vice President of Finance and 
                                      Administration and Chief Financial 
                                      Officer (Principal Financial and 
                                      Accounting Officer)

                                      14