3.5  RETREATS   If the defence mode for a system attacked is RETREAT, the retreat location is connected and owned by the defender, and the attack strength is greater than the defence strength (see 3.6) then any defending cruisers retreat before the space battle happens. If the retreat location is no good then the defender acts as if the defence mode was DEFEND. Ships other than cruisers can't retreat.
Retreats and retreat locations may be set by using the RETREAT action (see 3.4), but each time a cruiser moves between systems it may reset the retreat location in the destination system to be the system from which it came (so that when they retreat, they normally retreat back to wherever they came from). The retreat location does not reset when you move from a system that is not immediately connected by a single hyperspace link (ie. When moving through deep space) and retreat locations are not set to planets or asteroids.
Note: This means that retreating ships will normally try to retreat back the way they came, unless you specifically order them differently.

3.6  ATTACK & DEFENCE STRENGTHS   The attack strength in a battle is the number of cruisers ordered to attack, plus the weapons tech of the attacker. The defence strength is the number of ships in the system (cruisers and fighters) plus the population and five times the number of colony ships. Population counts double for planets. Weapons tech is added to the defence strength if there are cruisers or fighters present. Defence tech is added to the defence strength for a planet if there is population present.
ATTACKER =  CRUISERS + Weapons Tech
DEFENDER =  5*COLONY SHIPS + CRUISERS + FIGHTERS + POP
         Add Weapons Tech if there are any ships present
PLANETS  =  If there is any population then count it double and add Defence Tech.
Note: The populations of star systems and asteroids belts exist inside ships and space stations, and contribute to the defence of the system in the form of armed merchant ships and militia. Population on world defend themselves against bombardment from space with the use of missiles and ground based space craft, and against conquest from space with conventional ground and air forces.
Note: Cruisers and fighters may be used to help defend planets, and are equally effective at fighting battles in planetary space as in outer space. Fighting in planetary space means they get extra help from the local population, and are more likely to be able to make a successful defence.

3.7  BATTLE ROUTINE   A battle may involve several phases, during which each fleet loses a number of ships according to the strength of the opposition and the weapons technology level of the empires involved. Losses are normally calculated and applied simultaneously. Fractional losses are ignored. A battle ends when either the attacking fleet is wiped out, the defending fleet is wiped out, or the attacker gives up the attack.
More details of the methods used for deciding battles are given separately in section five, according to the actions used by the attacker (see paragraphs 4.1 to 4.4).

3.8  BATTLE LOSSES   Losses suffered by the defender are removed from cruisers first, and then destroyers. The attacking fleet will be all cruisers, so only these can be lost. Some of the cruisers lost in a battle may be "lost in space" (see 2.11b and 4.11) rather than destroyed. Note that only ships are lost during a battle, although population and industry may also be reduced aftewards (see 3.10). Colony ships will be destroyed or captured if the system is captured.