diff --git a/aioreactive/transform.py b/aioreactive/transform.py
index 8a5eeab..ac6cf88 100644
--- a/aioreactive/transform.py
+++ b/aioreactive/transform.py
@@ -18,7 +18,6 @@
 from expression.system import AsyncDisposable
 
 from .combine import merge_inner, zip_seq
-from .create import fail
 from .msg import (
     Key,
     Msg,
@@ -433,18 +432,29 @@ def retry(
     retry_count: int,
 ) -> Callable[[AsyncObservable[_TSource]], AsyncObservable[_TSource]]:
     def _retry(source: AsyncObservable[_TSource]) -> AsyncObservable[_TSource]:
-        count = retry_count
+        async def subscribe_async(observer: AsyncObserver[_TSource]) -> AsyncDisposable:
+            # Each subscription gets its own retry count
+            async def action(remaining: int, src: AsyncObservable[_TSource]) -> AsyncDisposable:
+                async def asend(value: _TSource) -> None:
+                    await observer.asend(value)
+
+                async def athrow(error: Exception) -> None:
+                    if not remaining:
+                        await observer.athrow(error)
+                    else:
+                        # Retry with one less attempt
+                        await action(remaining - 1, source)
+
+                async def aclose() -> None:
+                    await observer.aclose()
 
-        def factory(exn: Exception) -> AsyncObservable[_TSource]:
-            nonlocal count
+                _obv = AsyncAnonymousObserver(asend, athrow, aclose)
+                return await src.subscribe_async(_obv)
 
-            if not count:
-                return fail(exn)
-            else:
-                count -= count
-                return source
+            disposable = await action(retry_count, source)
+            return AsyncDisposable.create(disposable.dispose_async)
 
-        return pipe(source, catch(factory))
+        return AsyncAnonymousObservable(subscribe_async)
 
     return _retry
 
diff --git a/tests/test_retry.py b/tests/test_retry.py
new file mode 100644
index 0000000..c39fc8e
--- /dev/null
+++ b/tests/test_retry.py
@@ -0,0 +1,163 @@
+import asyncio
+
+import pytest
+from expression.core import pipe
+
+import aioreactive as rx
+from aioreactive import AsyncObserver
+from aioreactive.create import fail
+from aioreactive.testing import VirtualTimeEventLoop
+
+
+class EventLoopPolicy(asyncio.DefaultEventLoopPolicy):
+    def get_event_loop(self) -> asyncio.AbstractEventLoop:
+        return VirtualTimeEventLoop()
+
+
+@pytest.fixture(scope="module")
+def event_loop_policy():
+    return EventLoopPolicy()
+
+
+@pytest.mark.asyncio(loop_scope="module")
+async def test_retry_success():
+    """Test that retry successfully retries after initial failure."""
+    attempt_count = 0
+
+    def failing_source():
+        nonlocal attempt_count
+        attempt_count += 1
+        if attempt_count < 3:
+            return fail(Exception("Temporary failure"))
+        return rx.single("Success!")
+
+    # Create an observable that fails twice then succeeds
+    xs = rx.defer(failing_source)
+
+    # Retry up to 3 times
+    ys = pipe(xs, rx.retry(3))
+
+    # Create a test observer
+    values: list[str] = []
+
+    async def asend(value: str) -> None:
+        values.append(value)
+
+    obv: AsyncObserver[str] = rx.AsyncAwaitableObserver(asend)
+    async with await ys.subscribe_async(obv):
+        result = await obv
+        assert result == "Success!"
+        assert values == ["Success!"]
+        assert attempt_count == 3
+
+
+@pytest.mark.asyncio(loop_scope="module")
+async def test_retry_failure():
+    """Test that retry propagates errors after exhausting retry attempts."""
+    attempt_count = 0
+
+    def always_failing_source():
+        nonlocal attempt_count
+        attempt_count += 1
+        return fail(Exception("Permanent failure"))
+
+    # Create an observable that always fails
+    xs = rx.defer(always_failing_source)
+
+    # Retry only once (not enough)
+    ys = pipe(xs, rx.retry(1))
+
+    # Should fail after 2 attempts (initial + 1 retry)
+    exception = None
+
+    async def athrow(ex: Exception):
+        nonlocal exception
+        exception = ex
+
+    obv = rx.AsyncAwaitableObserver(athrow=athrow)
+
+    await ys.subscribe_async(obv)
+
+    try:
+        await obv
+    except Exception as ex:
+        assert str(ex) == "Permanent failure"
+        assert attempt_count == 2
+    else:
+        assert False
+
+
+@pytest.mark.asyncio(loop_scope="module")
+async def test_retry_immediate_success():
+    """Test that retry passes through successful completions without interference."""
+    xs = rx.single("Success!")
+    ys = pipe(xs, rx.retry(3))
+
+    values: list[str] = []
+
+    async def asend(value: str) -> None:
+        values.append(value)
+
+    obv: AsyncObserver[str] = rx.AsyncAwaitableObserver(asend)
+    async with await ys.subscribe_async(obv):
+        result = await obv
+        assert result == "Success!"
+        assert values == ["Success!"]
+
+
+@pytest.mark.asyncio(loop_scope="module")
+async def test_retry_zero_count():
+    """Test that retry with zero count doesn't retry."""
+    attempt_count = 0
+
+    def always_failing_source():
+        nonlocal attempt_count
+        attempt_count += 1
+        return fail(Exception("Failure"))
+
+    # Create an observable that always fails
+    xs = rx.defer(always_failing_source)
+
+    # Retry zero times (no retries)
+    ys = pipe(xs, rx.retry(0))
+
+    # Should fail immediately without retrying
+    exception = None
+
+    async def athrow(ex: Exception):
+        nonlocal exception
+        exception = ex
+
+    obv = rx.AsyncAwaitableObserver(athrow=athrow)
+
+    await ys.subscribe_async(obv)
+
+    try:
+        await obv
+    except Exception as ex:
+        assert str(ex) == "Failure"
+        assert attempt_count == 1
+    else:
+        assert False
+
+
+@pytest.mark.asyncio(loop_scope="module")
+async def test_retry_subscription_cancel():
+    """Test that retry properly handles subscription cancellation."""
+    xs: rx.AsyncSubject[int] = rx.AsyncSubject()
+    result: list[int] = []
+
+    ys = pipe(xs, rx.retry(3))
+
+    async def asend(value: int) -> None:
+        result.append(value)
+        # Get the subscription from the context and dispose it
+        await asyncio.sleep(0)
+
+    async with await ys.subscribe_async(rx.AsyncAnonymousObserver(asend)) as subscription:
+        await xs.asend(10)
+        await asyncio.sleep(0)
+        await subscription.dispose_async()
+        await xs.asend(20)
+
+    assert result == [10]