SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB
(Mark One)

        [X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                        EXCHANGE ACT OF 1934

                   For the quarterly period ended June 30, 2001

        [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                        EXCHANGE ACT OF 1934

             For the transition period from         to

                      Commission file number 000-31631

                          PERMA-TUNE ELECTRONICS, INC.
        (Exact name of small business issuer as specified in its charter)

               TEXAS                                    75-2510791
  (State or other jurisdiction of            (IRS Employer Identification No.)
   incorporation or organization)

                 111SOUTH  BIRMINGHAM  STREET,  WYLIE,  TEXAS 75098  (Address of
                    principal executive offices)

                                 (972) 442-6774
                         (Issuer's telephone number)


    Check  whether the issuer (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days. Yes [X] No [
]


     State the number of shares  outstanding of each of the issuer's  classes of
common equity. As of June 30, 2001 - 2,312,700 shares of Common Stock

                    Documents Incorporated by Reference: NONE

          Transitional Small Business Disclosure Format: Yes [ ] No [X]







<PAGE>




                          PERMA-TUNE ELECTRONICS, INC.
                                   FORM 10-QSB
                                      Index

                                                                         Page
                                                                        Number

PART I.    FINANCIAL INFORMATION

Item 1.Financial Statements (unaudited)

       Balance Sheet as of June 30, 2001                                  3

       Statements of Operations for the three months
       ended June 30, 2001 and 2000                                       4

       Statements of Operations for the  six months ended
       June 30, 2001 and 2000                                             5

       Statements of Cash Flows for the six months
       ended June 30, 2001 and 2000                                       6

       Notes to Financial Statements                                      7

Item 2. Management's Discussion and Analysis of Financial Condition      13
        and Results of Operations

Part II.   OTHER INFORMATION                                             27

Item 1.    Legal Proceedings                                             27

Item 2.    Change in Securities and Use of Proceeds                      27

Item 3.    Defaults Upon Senior Securities                               27

Item 4.    Submission of Matters to a Vote of Security Holders           27

Item 5.    Other Information                                             27

Item 6.    Exhibits and Reports on Form 8-K                              27

SIGNATURES                                                               28


                                       2



<PAGE>
PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements

                          PERMA-TUNE ELECTRONICS, INC.
                                 Balance Sheets

                                                                  June 30,
                                                                    2001
                                                               -------------
 ASSETS                                                         (Unaudited)
 CURRENT ASSETS:
     Cash                                                       $    2,666
     Accounts receivable, trade                                     19,717
     Inventory                                                      32,222
     Prepaid offering costs                                              -
     Deposits                                                          160
                                                                 ---------
       Total current assets                                         54,765
                                                                 ---------
 PROPERTY, PLANT AND EQUIPMENT:
     Molds and tooling                                               5,523
     Leasehold improvements                                          3,127
     Machinery and equipment                                        54,574
                                                                 ---------
                                                                    63,224
     Less accumulated depreciation                                  54,812
                                                                 ---------
                                                                     8,412
                                                                 ---------

                                                                $   63,177
                                                                 =========

 LIABILITIES AND STOCKHOLDERS' DEFICIT
 CURRENT LIABILITIES:
     Line of credit                                             $   20,300
     Accounts payable, trade                                        61,088
     Notes payable - stockholder                                    40,000
     Accrued liabilities                                             5,829
                                                                 ---------
       Total current liabilities                                   127,217
                                                                 ---------

 STOCKHOLDERS' DEFICIT:
     Common stock - 10,000,000 shares of  no par
        stock authorized, 2,312,700 issued and
        outstanding as of June 30, 2001                            248,395
     Additional paid-in capital                                     15,550
     Accumulated deficit                                          (327,985)
                                                                 ---------
       Total stockholders' deficit                                 (64,040)
                                                                 ---------

                                                                $   63,177
                                                                 =========

The accompanying notes are an integral part of the financial statements.

                                       3
<PAGE>



                          PERMA-TUNE ELECTRONICS, INC.
                            Statements of Operations

                                                 For the Three Months Ended
                                                        June 30,
                                               ------------------------------
                                                    2001             2000
                                               --------------  --------------
                                                 (Unaudited)      (Unaudited)

 NET SALES                                     $       74,023  $       73,840

 COST OF GOODS SOLD                                    26,501          46,484
                                               --------------  --------------
 GROSS PROFIT                                         47,522           27,356
                                               --------------  --------------
 OPERATING EXPENSES:
 General and administrative                            37,631          25,371
 Legal and professional                                29,740           4,275
 Research and development                               2,951             196
 Depreciation                                             841               -
                                               --------------  --------------
                                                       71,163          29,842
                                               --------------  --------------

 LOSS FROM OPERATIONS                                (23,641)          (2,486)
                                               --------------  --------------

 OTHER INCOME (EXPENSE):
 Interest expense                                      (3,899)         (1,685)
 Other                                                      5            (936)
                                               --------------  --------------
                                                       (3,894)         (2,621)
                                               --------------  --------------
 LOSS BEFORE FEDERAL INCOME TAX                       (27,535)         (5,107)

 Provision for federal income tax                           -               -
                                               --------------  --------------

 NET LOSS                                      $      (27,535) $       (5,107)
                                               ==============  ==============
 LOSS PER SHARE:
 Basic                                         $       (0.012) $       (0.002)
                                               ==============  ==============
 Diluted                                       $       (0.012) $       (0.002)
                                               ==============  ==============

The accompanying notes are an integral part of the financial statements.


                                       4
<PAGE>


                          PERMA-TUNE ELECTRONICS, INC.
                            Statements of Operations

                                                 For the Six Months Ended
                                                          June 30,
                                                ---------------------------
                                                     2001          2000
                                                 ------------   ------------
                                                 (Unaudited)    (Unaudited)

 NET SALES                                       $    127,342   $     123,247

 COST OF GOODS SOLD                                    52,331          66,548
                                                  ------------   ------------
 GROSS PROFIT                                          75,011          56,699
                                                  ------------   ------------
 OPERATING EXPENSES:
 General and administrative                            88,027          47,695
 Legal and professional                                60,036          22,313
 Research and development                               4,510             472
 Depreciation                                           1,682           1,074
                                                  ------------   ------------
                                                      154,255          71,554
                                                  ------------   ------------

 LOSS FROM OPERATIONS                                 (79,244)        (14,855)
                                                 ------------   ------------
 OTHER INCOME (EXPENSE):
 Interest expense                                      (5,313)         (3,110)
 Other                                                  5,006            (936)
                                                  ------------   ------------
                                                         (307)        (4,046)
                                                  ------------   ------------

 LOSS BEFORE FEDERAL INCOME TAX                       (79,551)        (18,901)

 Provision for federal income tax                           -               -
                                                  ------------   ------------

 NET LOSS                                        $    (79,551)  $     (18,901)
                                                  ============   ============

 LOSS PER SHARE:
 Basic                                           $     (0.034)  $      (0.009)
                                                  ============   ===========
 Diluted                                         $     (0.034)  $      (0.009)
                                                  ============   ============

The accompanying notes are an integral part of the financial statements.


                                       5
<PAGE>

                          PERMA-TUNE ELECTRONICS, INC.
                            Statements of Cash Flows

                                                      For the Six   For the Six
                                                      Months Ended  Months Ended
                                                       June 30,       June 30,
                                                     -------------  ------------
                                                          2001          2000
                                                     ------------- -------------
                                                      (Unaudited)   (Unaudited)
 Cash flows from operating activities:
 Net loss                                            $  (79,551)   $   (18,901)
                                                      ----------    -----------
 Adjustments to reconcile net loss to net cash
 used in operating activities:
 Depreciation                                             1,682          1,074
 Changes in operating assets and liabilities:
 (Increase) decrease in trade accounts receivable       (16,168)        (7,693)
 (Increase) decrease in inventory                        17,785           (724)
 (Increase) decrease in prepaid expenses                  3,414              -
 Increase in accounts payable                            39,402        (15,840)
 Decrease in accrued expenses                                 -         (9,171)
                                                      ----------    -----------
 Total adjustments                                       46,115        (32,354)
                                                      ----------    -----------

 Net cash used in operating activities                  (33,436)       (51,255)
                                                      ----------    -----------

 Cash flows used in investing activities:
 Acquisition of property and equipment                     (244)        (8,339)
                                                      ----------    -----------

 Cash flows from financing activities:
 Repayments of long-term debt                                 -        (10,000)
 Proceeds from line of credit                            22,500         13,500
 Repayments of line of credit                            (2,200)       (15,500)
 Proceeds from sale of stock                              5,000         60,000
                                                      ----------    -----------

 Net cash provided by financing activities               25,300         48,000
                                                      ----------    -----------

 Decrease in cash                                        (8,380)       (11,594)

 Cash, beginning of period                               11,046         24,752
                                                      ----------    -----------

 Cash, end of period                                 $    2,666  $      13,158
                                                      ==========    ===========

 Cash paid during the period for:
   Interest                                          $    5,313    $     1,791
                                                      ==========    ===========

The accompanying notes are an integral part of the financial statements.

                                       6
<PAGE>


                          PERMA-TUNE ELECTRONICS, INC.
                          Notes to Financial Statements
                                  June 30, 2001
                                   (Unaudited)


Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Operations
     ----------
     Perma-Tune  Electronics,  Inc. (the "Company") is a Texas  corporation that
     was  incorporated  in 1993. The Company is engaged in the  manufacture  and
     sale of high  performance  automobile  ignition  systems  for  distribution
     throughout the United States and Canada.

     Trade accounts receivable
     -------------------------
     The Company provides for  uncollectible  receivables using an allowance for
     doubtful  accounts.   As  of  June  30,  2001  the  Company  considers  all
     receivables  fully  collectible  and, as such,  no allowance is included in
     trade accounts receivable.

     Inventories
     -----------
     Inventories  are  valued  at the lower of cost or  market  with cost  being
     determined  using  the  first-in,  first-out  method  and  consist  of  the
     following at:

                                                          June 30,
                                                           2001
                                                     --------------
                                                        (Unaudited)
                 Raw materials                      $        26,353
                 Work in process                              1,101
                 Finished goods                               4,768
                                                     --------------
                                                    $        32,222
                                                     ==============

     Property, plant and equipment

     Property,  plant and  equipment are stated at cost and are  depreciated  or
     amortized over the estimated useful lives and methods as summarized below:

              Asset Type                 Estimated Life           Method
      -----------------------------------------------------------------------
      Molds and tooling                      5 years             Accelerated
      Leasehold improvements               5 - 7 years           Accelerated
      Machinery and equipment               Lease term          Straight-line



                                       7
<PAGE>


                          PERMA-TUNE ELECTRONICS, INC.
                          Notes to Financial Statements
                                  June 30, 2001
                                   (Unaudited)

Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

     Property, plant and equipment - (continued)
     -------------------------------------------
     Maintenance and repairs are expensed when incurred.  Material  expenditures
     which increase the life of an asset are capitalized  and  depreciated  over
     the estimated  remaining useful life of the asset. The cost of assets sold,
     or otherwise  disposed  of, and the related  accumulated  depreciation  are
     removed from the accounts and any gains or losses are  reflected in current
     operations.

     Depreciation  expense for the six months ended June 30, 2001 and 2000,  was
     $1,682 and $1,074, respectively.

     Federal income taxes
     --------------------
     Deferred  taxes are  calculated  on temporary  differences  resulting  from
     different  financial  and income tax  reporting  methods  used to recognize
     income and expenses.  These differences  result primarily from methods used
     to calculate depreciation and the allowance for doubtful accounts.

     Additional paid-in capital
     --------------------------
     The  major  shareholder  of the  Company,  Lonnie  Lenarduzzi,  contributed
     $15,550 cash to the Company in 1994.

     Concentration of risk
     ---------------------
     The Company  maintains its cash in bank deposit  accounts  which, at times,
     may exceed  federally  insured limits.  The Company has not experienced any
     losses in these accounts and believes it is not exposed to any  significant
     risk on cash.

     For the six months ended June 30, 2001, three customers  accounted for 11%,
     12% and 19%, respectively, of net sales.

     For the six months ended June 30, 2000, three customers  accounted for 16%,
     16% and 28%, respectively, of net sales.



                                       8
<PAGE>


                          PERMA-TUNE ELECTRONICS, INC.
                          Notes to Financial Statements
                                  June 30, 2001
                                   (Unaudited)

Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

     Concentration of risk - continued
     ---------------------------------
     The breakdown of these net sales is as follows:

                                  Net sales for          Net sales for
                                six months ended        six months ended
       Customer                   June 30, 2001          June 30, 2000
       --------                 ----------------       -----------------
           A                     $       14,427        $         19,119
           B                     $       14,867        $              -
           C                     $       24,403        $         34,988
           D                     $            -        $         19,494

     Net loss per share
     ------------------
     Basic and diluted  loss per share is  calculated  on the  weighted  average
     number of shares  of  common  stock  outstanding  during  the  period.  The
     weighted  average  number of shares  outstanding  at June 30, 2001 and 2000
     were 2,294,689 and 2,192,435, respectively.

     Revenue recognition and product warranty
     ----------------------------------------
     Revenue is recognized at the time the products are shipped.  The product is
     warrantied  for one year  from  original  purchase,  and,  at  management's
     option,  the Company will either  repair or replace  units that prove to be
     defective.  As of June 30, 2001, the Company has determined that a warranty
     provision is not necessary  given the lack of returned  products during the
     Company's history.

     The Digital  Fire product  includes  software,  the Digital Fire  Operating
     System (DFOS), which is incidental.  Therefore,  the costs of producing the
     software are  capitalized as inventory  along with the Digital Fire product
     on a unit  specific  basis and  charged to cost of goods sold when  revenue
     from the sale of those units is recognized.

     Additionally,  the Company has  developed  an  accessory  software  product
     termed Digital Fire Programming  Software  (DFPS).  The Company has not yet
     placed the DFPS on the market.  The DFPS will be  delivered  on-line and is
     used to customize the Digital Fire product for specific  applications.  The
     Company will recognize  revenue at the time the software is delivered.  The
     costs to develop the DFPS have been expensed as research and development.



                                       9
<PAGE>

                          PERMA-TUNE ELECTRONICS, INC.
                          Notes to Financial Statements
                                  June 30, 2001
                                   (Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

     Statements of cash flows
     ------------------------
     For purposes of the  statements  of cash flows,  the Company  considers all
     highly liquid financial  instruments purchased with an original maturity of
     three months or less to be cash  equivalents.  At June 30, 2001, there were
     no cash equivalents.

     Use of estimates
     ----------------
     The  preparation  of financial  statements  in conformity  with  accounting
     principles  generally  accepted  in the United  States of America  requires
     management  to make  estimates  and  assumptions  that affect the financial
     statements  at, and during the  reporting  periods.  Actual  results  could
     differ from these estimates.

NOTE 2 - INCOME TAXES

     At June 30, 2001 and 2000,  and for the years then  ended,  the Company has
     incurred net losses and, therefore,  has no tax liability. The net deferred
     tax asset generated by the loss carry-forward has been fully reserved.  The
     cumulative net operating loss  carry-forward is  approximately  $328,000 at
     June 30, 2001 and will expire in the years 2011 through 2019.

     The provision for federal  income tax consists of the following for the six
     months ended June 30:
                                                    2001              2000
                                                --------------    ------------
     Current (provision) benefit               $        -        $        -
     Deferred (provision) benefit                       -                 -
                                                --------------    ------------
                                               $        -        $        -
                                                ==============    ============

     Deferred income taxes consist of the following at June 30, 2001:

     Current:
       Deferred tax assets                            $        -
       Deferred tax asset valuation allowance                  -
                                                       --------------
                                                      $        -
                                                       ==============
     Non-current:
       Deferred tax assets                            $   45,705
       Deferred tax asset valuation allowance            (45,705)
       Deferred tax liabilities                                -
                                                       --------------
                                                      $        -
                                                       ==============

                                       10
<PAGE>


                          PERMA-TUNE ELECTRONICS, INC.
                          Notes to Financial Statements
                                  June 30, 2001
                                   (Unaudited)

NOTE 3 - RELATED PARTY TRANSACTIONS

     The Company has a $40,000 loan from a stockholder that is collateralized by
     a second lien on inventory.  The loan accrues interest at 10% with interest
     payments to be made quarterly and is due December 31, 2001.

     The  Company  has a license  agreement  with its  President  whereby it has
     acquired all rights to patents, trademarks, technical information and trade
     secrets  through  November  30, 2021 by payment of a yearly  license fee of
     $1,000.


NOTE 4 - COMMITMENTS

     On June 1,  2000,  the  Company  entered  into an  agreement  to extend its
     current lease of office and production  facilities under an operating lease
     through May 2005.  Lease expense was $10,550 and $7,500 for each of the six
     months ending June 30, 2001 and 2000, respectively.

     Minimum future lease rentals are as follows:

                     Year Ended
                     December 31,               Amount
                     ------------               ------
                         2001                  $18,300
                         2002                   18,600
                         2003                   18,600
                         2004                   18,600
                         2005                    7,750


NOTE 5 - WARRANTS

     On December 8, 1997,  the Company  issued an offering  circular for 125,000
     units priced at $2 per unit.  Each unit purchased  entitled the investor to
     one share of common stock and three stock purchase  warrants.  Each warrant
     entitled  the holder to  purchase  one share of stock for $2. The  warrants
     were to expire on December 31, 1999. However,  the expiration date has been
     extended to December 31, 2001.

     For the six months ended June 30, 2001,  no  additional  warrants have been
     issued  or  exercised  and at June  30,  2001,  348,000  warrants  remained
     outstanding



                                       11
<PAGE>


                          PERMA-TUNE ELECTRONICS, INC.
                          Notes to Financial Statements
                                  June 30, 2001
                                   (Unaudited)

NOTE 6 - LINE OF CREDIT

     On January 12, 2001 the Company  entered into a $15,000 line of credit with
     a bank  that  is  collateralized  by  the  Company's  accounts  receivable,
     inventory and equipment.  The line was  renegotiated  to $25,000 during the
     quarter ended March 31, 2001. The line requires monthly payments of accrued
     interest  accrued at the bank's prime rate (6.75%) plus 3.0% and matures on
     February  12,  2002.  As of June 30,  2001,  the  outstanding  balance  was
     $20,300.


NOTE 7 - INTERIM FINANCIAL STATEMENTS AND RELATED INFORMATION

     The  balance  sheet at June 30,  2001,  the income  statements  for the six
     months ended June 30, 2001 and 2000, and the information included herein to
     the notes for those  periods,  have not been  audited.  It is  management's
     opinion that all  necessary  and  recurring  adjustments  have been made in
     order that the above referenced financial statements are not misleading.


NOTE 8 - CONTINUED OPERATIONS

     As shown in the  financial  statements,  the Company  incurred an operating
     loss of  approximately  $80,000 for the six months  ended June 30, 2001 and
     has an accumulated deficit of approximately $328,000. Accordingly, there is
     substantial  doubt  about the  Company's  ability  to  continue  as a going
     concern.   The  accompanying   financial  statements  do  not  include  any
     adjustments  relating  to  the  recoverability  of  assets  or  amounts  of
     liabilities  should the Company be unable to  continue as a going  concern.
     The accompanying financial statements have been prepared on a going concern
     basis,  which  contemplates  the  realization of assets and  liquidation of
     liabilities  in the normal  course of business.  Management is committed to
     reducing  expenses,  and continues to attempt to raise capital  through the
     issuance of common  stock  through  registration  with the  Securities  and
     Exchange Commission (SEC).




                                       12
<PAGE>


Item 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations

General
-------
The following  discussion and analysis  should be read in  conjunction  with the
Company's financial statements and related footnotes for the year ended December
31,  2000  included  in its Annual  Report on Form  10-KSB.  The  discussion  of
results,  causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.

OVERVIEW

Since its  inception,  the Company has focused on the  production,  research and
development  of Porsche and  Ferrari  high  performance  ignition  systems.  The
Company's  principal  source of revenue has been from the Porsche  repair  parts
product  line.  In 1997 the Company  began  development  of new product lines to
supply many repair and performance  parts for a variety of cars and trucks.  The
Company cannot estimate the size of its marketplace.

Production, profit margin and operational efficiency continued to improve in the
second quarter of 2001. While the Company has taken steps to contain the cost of
legal and accounting  expenses  associated with fulfilling the requirements of a
fully reporting company,  it still carries a high debt load for services related
to these  items  accrued  in the last 18 months.  Administrative  and legal fees
associated  with the  preparation  of  quarterly  filings with the SEC have been
reduced by bringing the bulk of that work in-house, rather than outsourcing it.

Also in the second quarter of 2001, the Company has reduced the raw materials it
stocks, utilizing on hand reserves, and replenishing stock in smaller quantities
on a  just-in-time,  as-needed  basis  in  order to  reduce  capital  tied up in
inventory.  Website development costs have been reduced from $4156 in the second
quarter of 2000, to $210 in the second quarter of 2001.


During this period, we have been limited in our ability to raise capital from an
offering of our stock and exercise of our warrants  because the Company's  stock
is listed on the Pink Sheets,  which is not an automated quotation system and is
characterized by an extremely low volume of activity.  The Company's  ability to
raise equity  capital will be impeded  until it is listed on the NASDAQ Over the
Counter  Bulletin Board.  Exercise of warrants is not attractive to shareholders
at this time because the current  stock price is lower than their  warrant price
of $2.00 per share.

Management   believes  it  is  well   positioned   to  take   advantage  of  the
infrastructure  improvements  it has made  (implementation  of fully  integrated
manufacturing/data  base  accounting  software,  the dedication of an officer to
finance/SEC   compliance   and  marketing   planning,   outsourcing  of  certain
manufacturing  functions) when  significant  capital becomes  available.  In the
second  quarter of 2001,  cost  reductions  began to be  realized as a result of
using the Company's integrated software, and as a result of the dedication of an
officer to finance and SEC compliance.  This software enables Company  personnel
to calculate and track many of the complex measurement ratios that it previously
required professional assistance to manage.

                                       13
<PAGE>

Since the Company has not yet applied to be listed on the NASD OTC BB and raised
money from its  outstanding  warrants,  we have focused on our existing  product
lines to provide operating capital.  The Company has concentrated its efforts on
streamlining  and  increasing  the  production of its existing  product lines in
order to  eliminate  backorders  for  Porsche  products,  and to begin  shipping
Mercedes products.  As of the end of the second quarter of 2001, the Company has
achieved  a balance  allowing  it to ship with very short  lead  times,  usually
shipping from stock on hand.  The Company has put  procedures in place to ensure
that manufacturing is completed just in time to fill orders, which will not only
minimize  capital  tied  up  in  on-hand  stock,  but  will  increase   customer
satisfaction and permit quicker collection of accounts  receivable.  The Company
has  increased  its efforts to find  European and Japanese  distributors  of its
products.

The Company is pursuing its plans to be listed on the OTC BB, and has  increased
its efforts to bring additional market makers on board to assist in boosting the
trading volume of its stock.


NEW PRODUCTS

The  Company  plans to make the  following  inventions  the basis of new product
lines.

The New Perma-Tune
------------------

The Rev. F  Perma-Tune  is the result of  technology  the company  developed  to
replace the original Perma-Tune design. The product can be expanded to Mercedes,
Honda and Toyota cars and trucks.  The new  Perma-Tune  product is both a repair
part and a performance/fuel economy enhancement for Ferrari, Porsche,  Mercedes,
Honda and  Toyota  vehicles.  The  Company  intends  to  continue  trade  secret
protection  of the  Perma-Tune  product  line.  The  Company  may  file a patent
application,  copyright  and or  trade  secret  protection  on some  aspects  of
Perma-Tune products for use on General Motors and Ford vehicles.

The Digital Fire
----------------

Digital Fire is the Company's newest product line designed for racecars only. It
competes with the makers of sophisticated  engine control  systems.  The Company
has delayed the introduction of the Digital Fire product line until it can raise
additional capital.  During this delay, the Company has continued development of
the  product  line with the recent  addition of Palm Pilot  interface  software.
Management  believes  that the  Digital  Fire Palm  Pilot  software  creates  an
affordable and  sophisticated  engine  control system that may have  mass-market
appeal.  This is because the  customer can adapt the software for his or her own
personal  needs.  The  Company  must  complete  production  tooling at a cost of
approximately  $60,000 and  complete  and amass an inventory of 100 units before
marketing the Digital Fire. Marketing expenses are estimated at $80,000.

                                       14
<PAGE>

The Company has designed the Digital Fire product line that generates revenue in
the manufacturing of hardware and software.  The Digital Fire involves two kinds
of software  akin to the desktop  computer.  The Digital Fire  Operating  System
(DFOS) is like Windows to a desktop computer and the Palm Pilot software is like
a word processor.  For the Digital Fire, DFOS is the software that determines if
the unit is a four  cylinder,  six  cylinder  or eight  cylinder  product.  This
software configures the Digital Fire for what kind of car it will be used on but
not what to do. The ability to change the "to do"  instructions  are intended to
fine  tune the  engine  for  maximum  performance  given  any  different  set of
variables at the race track.  During the last step of manufacture for each unit,
a special chip  containing  the DFOS is inserted that  determines  which type of
Digital  Fire the unit  will be.  Simply  programming  new DFOS can  create  new
features and products.  This software is not retrievable from any unit and it is
proprietary.  It cannot be altered once the unit is  completely  assembled.  The
Digital Fire Programming Software (DFPS) is the software that allows the user to
program the  Digital  Fire.  This  software  can be  continuously  upgraded  and
customized  like Word or any other user  interface.  This software  resides in a
Palm Pilot  personal  organizer.  It is very  inexpensive,  easy to use,  and is
connected  to the Internet via the desktop  computer or the new  Connected  Palm
Pilot.  The  Company  intends  to  continue  developing  new DFPS  designed  for
distribution  through the Internet or compact disk. The open architecture design
of the Digital  Fire may allow the Company to reduce DFPS  development  costs by
acquiring software developed by freelance programmers.

New Product Research and Development: the Plasma Injector
---------------------------------------------------------

In 1997,  Laurence Livermore National Laboratory ("LLNL") approached the Company
with a request to develop a new kind of ignition  system with certain  technical
specifications.  The eventual  intended use for this ignitor was not revealed to
the Company by LLNL. At the time LLNL  approached  the Company,  we had no prior
experience in the field of plasma injection technology development.  To the best
of our knowledge,  we were not competing with any other company on this project.
The Company, at its expense, conducted the research necessary to develop special
ignitors to satisfy LLNL's requirements.  Prototype units were delivered to LLNL
in 1998. The Company retains the rights to the intellectual  property created in
the manufacture of these ignitors for LLNL,  although patent  protection has not
been applied for.

In 1999,  the U.S. Navy Surface  Weapons  Center  approached  the Company with a
requirement  for  a  device  with  technical  specifications  similar  to  those
requested by LLNL. In response to this request, the Company developed the Plasma
Injector.  To the best of our  knowledge,  we were not competing  with any other
company on this project. To date, seven Plasma Injectors have been manufactured;
one was sold to the U.S.  Navy, and six have been used by the Company in various
research  projects  aimed  at  developing  commercial   automotive,   space  and
industrial applications for the technology.


                                       15
<PAGE>

Plasma Injectors can be used to ignite liquid fuel rockets,  turbine engines, to
ignite boilers used in the petrochemical industry, and for commercial automotive
applications.  To date,  at  least  one  scientific  application  of the  Plasma
Injector  has been  established  with the sale of a  prototype  unit to  Bechtel
Nevada.  In June 2000,  Bechtel  incorporated the Plasma Injector into equipment
they use for a research program with the U.S. Department of Energy. Although the
Company is not under  long-term  contracts  with  LLNL,  the U.S.  Navy  Surface
Weapons  Research  Center  or  Bechtel,  we will  continue  to work  with  these
organizations,  and there are no restrictions on the Company's use of technology
developed in conjunction with any of these projects.

In  February  2000,  the  Company  began a dialog  with the Plasma  Science  and
Technology  Center at the  Massachusetts  Institute of Technology to incorporate
the Plasma  Injector into MIT's  Plasmatron.  The Plasmatron is an  experimental
device that reduces auto emissions by removing the danger of using clean burning
but volatile  hydrogen to power vehicles.  It works by splitting  hydrogen atoms
from  conventional  petroleum  just fast  enough for the  engine to consume  it,
thereby  eliminating the need to store hydrogen fuel onboard the vehicle.  As of
March 2001,  that dialog has not progressed.  As of June 30, 2001,  there are no
further developments to report on this project.

Management  intends to conduct more Plasma Injector research in combination with
its Digital  Fire during the next two years.  The Company has already  completed
the  interface  circuitry  between the Plasma  Injector and the Digital Fire. In
order to  investigate  the potential  market for  commercial  applications,  the
Company  will need to make other  engine  designers  and  engineers,  as well as
scientists, aware of the Plasma Injector technology.

This can be done via  advertising  in trade  publications  and via  Internet web
sites  for  an  estimated  cost  of  approximately  $20,000.  In  addition,  for
automotive  applications,  testing and customization will be performed to tailor
Plasma  Injector  systems  for  individual  vehicles  for an  estimated  cost of
approximately   $5,000.   A  White  Paper  describing  the  technology  and  its
pollution-reducing  benefits has been  written,  and has been  provided to Texas
legislators  and certain  scientists  engaged in the development of alternative,
clean fuels.

The Plasma Injector-to-Digital Fire interface circuitry Research and Development
program is complete,  but new product  development has been halted on the Honda,
Toyota,  GM and Digital  Fire  product  lines  pending  funding.  The Company is
working on finding new commercial  applications  for the Plasma Injector product
line.  Bechtel Nevada has purchased a Plasma Injector and has successfully  used
it in their scientific  experiments.  It is not known at this time if there will
be  subsequent  sales of the product for this  purpose.  The  dialogue  with MIT
concerning the Plasma Injector has not progressed.

The Company continues to seek new applications for its Plasma Drive product, and
has sold a unit to Moller Industries of Davis, California.  Moller is developing
low-pollution  engines  and is  experimenting  with the Plasma  Drive for use on
these engines. These engines would be used on aircraft and automobiles,  and are
intended to replace conventional piston engines.

                                       16
<PAGE>

The Company has also begun a dialogue with Pratt & Whitney  Aerosciences  Center
of Seattle,  Washington  about using the Plasma  Drive in  experiments  on their
pulse  detonation  engine.  The pulse  detonation  engine is being  studied as a
possible  replacement  for  the  jet  engines  now in use by  airlines  and  the
military.

The US Mine Safety and Health Administration has purchased a single unit for use
in their experimentation.

The  results  of  these  experiments  by  Moller  Industries,  Pratt  &  Whitney
Aerosciences  Center and the US Mine  Safety and Health  Administration  are not
known at this time, nor is it known if these  experiments  will result in future
sales by the Company.

The company is currently able to manufacture Plasma Injectors utilizing existing
manufacturing  facilities without incurring  additional  expense.  However,  new
product  development and the expansion of our manufacturing staff and facilities
have been halted pending funding.


MARKETING STRATEGY

Management  has  retained  a public  relations  firm,  Shapiro  &  Company,  for
assistance in the planning and implementation of new product marketing strategy.
They have created a marketing plan,  presentation folders and Mercedes brochures
at a cost of  $17,629.  The  Company  now has the  option of  putting  Shapiro &
Company on retainer for $3000.00 per month to handle public relations.  Until it
is  financially  able to put Shapiro & Company on  retainer,  the  Company  will
continue to foster word of mouth  advertising and will continue to conduct sales
training missions to the Company's wholesale distributors.

The Company sells to six wholesale  distributors who supply an unknown number of
distributors and retailers.  The products of the Company are sold throughout the
United  States.  All sales to  warehouse  distributors  are final.  There are no
rights of return.  The  Company  warrants  that its  products  will be free from
defects in materials and  workmanship  for one year from the time of purchase by
the end user. Should the Company determine that there are defects within the one
year period, management has a choice to repair or replace the defective unit. In
the second  quarter of 2000,  the Company  repaired  two units and  replaced two
units; in the second quarter of 2001, the Company repaired one unit and replaced
three  units.  In the first half of 2000,  the  Company  repaired  two units and
replaced four units.  In the first half of 2001,  the Company  repaired one unit
and replaced four units. Costs related to handling repairs and replacements have
been  insignificant  and immaterial  historically.  Adoption of SAB-101 will not
affect our  financial  statements  because of the  Company's  no right of return
(i.e., all sales are final) policy.


                                       17
<PAGE>

The short-term strategy is to begin shipment of the Mercedes products in fall of
2001.  The Company  already has some of these products in inventory and is ready
to produce  more.  A  distribution  network  for these  parts has  already  been
established.  In speaking with its major distributors  (Worldpac,  Interamerican
Motor Corp.,  Performance  Products and SSF Imported Auto Parts, Inc.) regarding
the Mercedes  product line,  the Company has learned that they are interested in
carrying the line,  and that they have customers who are ready to buy it as soon
as they have  received  product  samples and price lists from the  Company.  The
Company does not have written commitments for these potential sales.

The interim  marketing  strategy is to develop the Honda and Toyota product line
in the last quarter of 2001,  and then move on to the  development of the market
for  Perma-Tune  products for domestic  makes in 2002. The product lines require
that  production  tooling be made,  for which funding is currently  unavailable.
Most of the Company's  distribution  network  already  includes Asian car parts.
There is  interest  in the  Perma-Tune  Toyota  repair  parts  because  there is
currently no aftermarket  supply available.  The Company knows of no aftermarket
manufacturing   companies   making   replacement   ignition  modules  for  these
automobiles.   In  1999  the  Company  began  negotiations  with  Toyota  Racing
Development  (TRD) for  distribution of the Perma-Tune  product line through TRD
catalogs and TRD retail shops  located  inside Toyota new car  dealerships.  The
Company has demonstrated  its applicable  technology to TRD. TRD engineering has
approved  the  basic  design.  Pending  contract  negotiations  for start up and
tooling costs and execution of non-disclosure agreements, the Company has agreed
to manufacture product for distribution under the TRD name. Since TRD has yet to
sign non-disclosure  agreements with the Company, requires that the Company fund
the tooling  required for  manufacturing,  and such funding is not  available at
this time, the project has not progressed.

All Perma-Tune  ignition  systems  designed for street vehicles are certified by
California  Air  Resources  Board  Executive  Order D-210.  There was no testing
required  to  obtain  this  certification   because,  in  compliance  with  CARB
regulations,  the Company  was able to state that its  products do not alter the
ignition  timing of the engine.  Therefore,  if the vehicle  meets EPA standards
with its original  ignition system, it will meet EPA standards with a Perma-Tune
ignition system installed on it.


2005 PLAN

Management  intends to expand its market globally.  The Company plans to combine
the Digital Fire and Plasma Injector technology into a new product line to allow
car  manufacturers to meet new,  stricter EPA air pollution  standards.  Revised
guidelines  for improving  light truck and SUV fuel economy being  formulated by
the EPA in 2001 may potentially have a positive effect on the Company's sales.


                                       18
<PAGE>

MANUFACTURING OVERVIEW

Management has prepared for rapid growth. The Company's  manufacturing technique
is flexible  because of its modular design and it can respond easily to customer
demand.  Modules  can be  mass-produced  and  then  assembled  to meet  changing
purchase  orders.  Production  can be  increased  and  new  products  introduced
readily.  Currently  the  Company  is  operating  at a small  percentage  of its
manufacturing capacity.


RESULTS OF OPERATIONS

Three months ended June 30, 2001 vs. June 30, 2000
--------------------------------------------------
In the second quarter of 2001, the Company experienced .2% sales growth as gross
sales  increased  from $73,840 in the second  quarter of 2000 to $74,023 for the
current period.  A total of 190 units were sold in the second quarter of 2001 at
an average  price of $165. A total of 156 units were sold in the second  quarter
of 2000 at an average price of $168.  This change in average price per unit sold
was due primarily to increased  unit sales of lower-cost  new products,  such as
coils, repair wire harnesss, and spark plugs. In the second quarter of 2001, the
company  continued  to ship its current  product line from stock and shipped new
product.  The new product models shipped were the MB010,  RV010,  PR020,  PL020,
HN050, DF045 and UFX79.

Gross  profit in the second  quarter of 2000 was $27,356  compared to $47,522 in
the second quarter of 2001. As a percentage of sales,  gross profit increased in
the second  quarter of 2001 to 64% from 37% in the first half of 2000.  This was
due to the sale of new  products  with a lower cost of goods sold and  resulting
higher profit margins which the Company began shipping in 2001.

General  and  Administrative  (G & A) expenses  were  $37,631 and $25,371 in the
Second quarter of 2001 and 2000,  respectively.  As a percentage of sales, G & A
expenses increased to 51% from 34%. This increase was due to increases in salary
resulting  from  bringing a dedicated  officer  onboard to handle  financial and
legal  matters,  a very  significant  increase in payroll  taxes  related to the
Company's first-ever unemployment claims by two former employees.  Other factors
in this  increase  in G&A  expense  include  the  offering  of health  insurance
benefits to its  employees,  an increase in the lease  payments on the Company's
building,  the  Company's  appearance  at an  investor  meeting to raise  equity
capital in California in the second quarter and travel  expenses  related to R&D
activities  with US MagneGas.  Other income for the first half of 2001 increased
over the first half of 2000 due to the  receipt of  consulting  fees  associated
with Mr. Lenarduzzi's research and development work with US MagneGas.

Interest expenses  increased from $1,685 in the second quarter of 2000 to $3,899
in the second quarter of 2001. Third-party debt levels increased proportionately
for the  period.  This  increase  is due to the  Company's  agreements  with its
attorneys  and  accountants  to  extend  payment  for  fees  resulting  from the
Company's  activities  related to meeting the  requirements of a fully reporting
company, and in creating its initial SEC filings.

                                       19
<PAGE>

Research and  development  expenses  were $196 in the second quarter of 2000 and
$2,951 in the second  quarter of 2001.  This  increase  is due to the  Company's
research and  preparations in anticipation of shipping Honda units in the second
quarter of 2001.

Since the Company  incurred net losses for both first half 2000 and 2001,  there
was no income  tax  liability  for  either  quarter.  As of June 30,  2001,  the
Company's  approximate  accumulated  losses were  $328,000 to be offset  against
future  income thru year end Dec. 31, 2012.  The majority of this net  operating
loss carry forward,  $272,000, has occurred in the last four years. This was the
direct result of increased R&D expenses for developing new products as well as
the  costs  associated  with the  responsibilities  of  being a fully  reporting
company.  These costs  relating to full  reporting  resulted  from the Company's
preparations to trade securities on the NASDAQ OTC-BB,  which will fund the mass
production of all product lines.

Six months ended June 30, 2001 vs. June 30, 2000
-------------------------------------------------
In the first six months of 2001,  the Company  experienced  3.3% sales growth as
gross sales  increased  from  $123,247 in the first half of 2000 to $127,342 for
the current period.  A total of 441 units were sold in the first half of 2001 at
an  average  price of $165.  A total of 440 units were sold in the first half of
2000 at an average price of $168. This change in average price per unit sold was
due primarily to increased unit sales of lower-cost new products, such as coils,
repair wire  harnesss,  and spark plugs.  In the first half of 2001, the company
continued  to ship its current  product line from stock and shipped new product.
The new product models shipped were the MB010, RV010, PR020, PL020, HN050, DF045
and UFX79.

Gross  profit in the first half of 2000 was  $56,699  compared to $75,011 in the
first half of 2001.  As a percentage  of sales,  gross  profit  increased in the
first half of 2001 to 58.9%  from 46.0% in the first half of 2000.  This was due
to the sale of new products with a lower cost of goods sold and resulting higher
profit margins which the Company began shipping in 2001.

General  and  Administrative  (G & A) expenses  were  $88,027 and $47,695 in the
first six months of 2001 and 2000, respectively. As a percentage of sales, G & A
expenses  increased to 69.1% from 38.7%.  This  increase was due to increases in
salary  resulting from bringing a dedicated  officer onboard to handle financial
and legal matters,  a very significant  increase in payroll taxes related to the
Company's first-ever unemployment claims by two former employees.  Other factors
in this  increase  in G&A  expense  include  the  offering  of health  insurance
benefits to its  employees,  an increase in the lease  payments on the Company's
building,  the  Company's  appearance  at an  investor  meeting to raise  equity
capital in California in the second quarter and travel  expenses  related to R&D
activities  with US MagneGas.  Other income for the first half of 2001 increased
over the first half of 2000 due to the  receipt of  consulting  fees  associated
with Mr. Lenarduzzi's research and development work with US MagneGas.

                                       20
<PAGE>

Interest expenses increased from $3110 in the first half of 2000 to $5313 in the
first half of 2001.  Third-party debt levels increased  proportionately for 2001
year  to  date.  This  increase  is due to the  Company's  agreements  with  its
attorneys  and  accountants  to  extend  payment  for  fees  resulting  from the
Company's  activities  related to meeting the  requirements of a fully reporting
company, and in creating its initial SEC filings.

Research and development expenses were $472 in the first half of 2000 and $4,510
in the first half of 2001.  This increase is due to the  Company's  research and
preparations in anticipation of shipping Honda units in the 2nd quarter of 2001.

Since the Company  incurred net losses for both first half 2000 and 2001,  there
was no income  tax  liability  for  either  quarter.  As of June 30,  2001,  the
Company's  approximate  accumulated  losses were  $328,000 to be offset  against
future  income thru year end Dec. 31, 2012.  The majority of this net  operating
loss carry forward,  $298,000, has occurred in the last four years. This was the
direct result of increased R&D expenses for  developing  new products as well as
the  costs  associated  with the  responsibilities  of  being a fully  reporting
company.  These costs  relating to full  reporting  resulted  from the Company's
preparations to trade securities on the NASDAQ OTC-BB,  which will fund the mass
production of all product lines.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

For the period ended June 30, 2001, the Company has not generated  positive cash
flow from its own operations due to the preliminary  nature of such  operations,
ongoing  investment in research and  development  and  expenditures to build the
appropriate  infrastructure  to support its expected growth.  Consequently,  the
Company has been  dependent on private  placements of its equity  securities and
debt financing to fund its cash  requirements,  as well as revenues  provided by
the normal operations of Perma-Tune.

On January 12, 2001 the Company  entered  into a $15,000 line of credit with The
American National Bank of Texas in Wylie that is collateralized by the Company's
accounts  receivable,  inventory and  equipment.  The line was  renegotiated  to
$25,000 on March 12, 2001, with an initial  interest rate of 11.5%.  Interest is
variable,  based on the Prime Rate plus 3%. Accrued interest is payable monthly,
and the maturity date is March 12, 2002. For the period ended June 30, 2001, the
principal balance owed on this line of credit was $20,300, with an interest rate
of 9.75%.

On December 8, 1997, the Company  issued an offering  circular for 125,000 units
priced at $2.00 per unit. Each unit entitled the investor to one share of common
stock and three stock  purchase  warrants.  Each warrant  entitled the holder to
purchase one share of stock for $2.00. The warrants expire on December 31, 2001.
At March 31, 2001,  there are 348,000  warrants  outstanding.  Proceeds from the
exercise of warrants are planned to fund  production  tooling and start up costs
of the Honda and Toyota  products  lines.  The Company plans to manufacture  the
required tooling estimated at $35,000 in materials and 560 man hours.  There may
be other costs  associated  with attaining the  California  Air Resources  Board
certification for the Honda and Toyota product lines. In the year ended December
31,  2000,  the  Company  sold  150,000  shares in a private  placement  for net
proceeds of $60,000.  No additional  private  placements  were made in the first
quarter of 2001.  By consent of the Board of  Directors  on June 12,  2001,  the
Company sold 20,000  shares of  restricted  stock for $5,000 ($.25 per share) to
Kiowa Oil Company. The market price on June 12, 2001 was $1.25 per share.

                                       21
<PAGE>

As of June 30,  2001,  the  Company's  cash  reserves  totaled  $2,666 and total
current  assets were  $54,765.  The Company is continuing  production  and sales
efforts as well as further research and development and has yet to break-even in
terms of both  cash  flow and  profitability.  For the  remainder  of 2001,  the
Company has no long-term  commitments but expects to incur  additional costs for
research and  development  . It also  expects to expand its sales and  marketing
effort.  These efforts  could  significantly  increase  demand for the Company's
products beyond the Company's  current  production  capacity.  While the Company
believes  it  can  increase  its  production  capacity  to  meet  sales  demand,
significant additional capital could be required to meet expansion requirements.

Inventory at June 30, 2001 was $32,222.  Inventory at June 30, 2000 was $45,275.
The inventory  turnover ratios were 3.2/yr.  and 3.4/yr.  for the periods ending
June  30,  2001 and  2000,  respectively.  This  slight  increase  was due to an
increase in production  activity to fulfill second quarter 2001 purchase orders.
Accounts  receivable ratios were 28 days and 30 days for the periods ending June
30, 2001 and 2000,  respectively.  Working  capital ratios were .43 and 1.58 for
the periods ending June 30, 2001 and 2000, respectively.  This change was due to
a  continuing  increase in accounts  payable for legal and  accounting  services
resulting from the Company's preparation and filing of SEC forms, and accounting
fees associated with the preparation of financials required of the Company since
it became fully  reporting.  The Company has agreements with its accountants and
attorneys  to pay these  balances  as funding  becomes  available  via  accounts
receivable generated from the normal operations of the Company.

The Company presently has an outstanding loan payable on demand to Terry Taylor,
a stockholder.  Principal balance as of June 30, 2001 is $40,000. The loan bears
an interest rate of 10%. Interest is payable  quarterly.  The loan is secured by
inventory.

The Company is taking steps to raise equity  capital.  The Company's  ability to
raise additional capital will be impeded until it is listed on the NASD Over the
Counter Bulletin Board.  There can be no assurance that any new capital would be
available to the Company or that adequate  funds for the  Company's  operations,
whether from the Company's  revenues,  financial markets,  or other arrangements
will be  available  when needed or on terms  satisfactory  to the  Company.  The
Company has no  commitments  from  officers,  directors or affiliates to provide
funding.  The failure of the Company to obtain adequate additional financing may
require the Company to delay,  curtail or scale back some or all of its research
and  development  programs,  sales  and  marketing  efforts,  and  manufacturing
operations.  Any  additional  financing  may involve  dilution to the  Company's
then-existing shareholders.

Without additional  capital funding,  the Company believes it can operate at its
current level of liquidity for twelve to twenty-four  months.  However, it hopes
to obtain  short-term  funding  until  operations  are ramped up,  creating  the
profitability that will improve its liquidity position.


                                       22
<PAGE>

RECENT DEVELOPMENTS
-------------------
In the second quarter of 2001,  the Company  continued  taking  advantage of the
infrastructure improvements made during 2000 (implementation of fully integrated
manufacturing/accounting  software,  availability  of a  dedicated  officer  for
finance,   marketing  and  SEC  compliance  tasks  and  outsourcing  of  certain
manufacturing functions).

The Company has compiled a database of potential new wholesale  distributors and
end users to promote its existing  product line sales through  low-cost,  direct
mail  marketing  and  e-mail.  The new  Company  web site has been posted on the
Internet and is being continually  fine-tuned and updated. In the second quarter
of 2001, the Company has continued to focus on sales of its core product line to
fund  operations  by seeking  new  distributors  for its  products in Europe and
Japan.

The Company's  newly updated  Internet site has been  instrumental in making new
connections with two European parts  distributors.  On May 25, 2001, the Company
made an initial sale of ten units to Mittlemotors in Bochem, Germany, with their
commitment to purchase a minimum of 100 units per year, all sales final. Also in
the second  quarter,  the Company made a tentative  agreement with similar terms
with a parts distributor in France, Jean Buser Porsche in Paris.

Domestically,  the Company added San Diego  Motorsports (and its sister company,
Black  Forest  Racing)  as new  distributors  in the second  quarter.  San Diego
Motorsports and Black Forest Racing specialize in high-performance  racing parts
and accessories,  and cater to professional race teams and Porsche  enthusiasts.
At their own expense,  they are marketing the Company's  products via print ads,
and a featured page on their extensive website.

The  Company  has  continued  building  finished  product  for the  shelf of its
existing  product  line,  is shipping  all orders from stock,  and has  improved
accounts receivable turn-around time.

The Mercedes Benz Kit 1 is now in stock. The Company has selected  Kingsborne to
subcontract the  manufacturing of the supplemental  Mercedes products for Kits 2
and 3. Initial reaction of the Company's wholesale  distributors to the Mercedes
product release in December of 2000 has been  conservative  due to the product's
cost.  Wholesale prices for the Perma-Tune  Mercedes Benz Kits are: $380 for Kit
#1, $310 for Kit #2 and $643 for Kit #3.  While these prices are  comparable  to
other new replacement  parts kits offered by our  wholesalers,  their concern is
that  customers are currently  purchasing  rebuilt  replacement  parts at prices
lower than that of new replacement parts.

The feedback the Company is receiving on initial  sales of the Mercedes  product
line has been very  favorable in terms of product  quality and market  interest.
However,  this product line is perceived as "too expensive" vs. rebuilt Mercedes
ignition  systems  (although the Perma-Tune is new  equipment).  Therefore,  the
Company is considering a possible  redesign of the product aimed at reducing its
price.  Wholesalers indicate that if enough of their customers inquire about the


                                       23
<PAGE>

product,  they will stock the products.  The Company's  research  indicates that
there are no  aftermarket  products  that compete with the  Company's  offerings
available,  and that consumers will buy the Company's  Mercedes Kits if they are
readily available to them. After speaking with the Company's major  distributors
(Worldpac,  IMC,  Performance  Products  and SSF),  the Company has learned that
these  distributors  are  interested in carrying the product line, and that they
are aware of customers of theirs who will buy the products. The distributors are
awaiting receipt of production  samples of the spark plug wire harness component
of the kits (they have already received  prototype samples of the wire sets) and
price lists before they proceed to stock the product line. In the second quarter
of 2001,  the  Company  finalized  design  specifications  with  Kingsborne  for
manufacturing wire sets, and expects production to begin in the third quarter of
2001. The Company does not have written  commitments from these  distributors to
purchase the products.  Since funding for large-scale  advertising and marketing
is not  available at this time,  the Company is  promoting  the products via its
website and direct mailings of postcards.

The Company  therefore  has decided to take a grass roots  approach to marketing
the Mercedes  product line to create demand for the product.  We have mailed new
product brochures to all of our existing wholesale distributors as well as every
Mercedes  repair shop in our area to pique  interest,  and we are  beginning  to
receive interested inquiries in response. Interest has been further generated by
postings on the Mercedes lists-server of the Internet inviting interested people
to visit our website, and our ad in the local Mercedes Benz Club newsletter.  In
the second quarter, the Company began enclosing a Mercedes product line brochure
with every  ignition unit it sells.The  Company has continued to search for more
commercial  applications for its Plasma Injector  technology.  The United States
Mine Safety and Health  Administration  has  expressed  interest  in  Perma-Tune
technology  for use in their  experiments  to  increase  the  safety  of  mining
workers. In the second quarter of 2001, the Company sold one unit to the US Mine
Safety and Health Administration.  Results of their experimentation are unknown,
and the Company does not know if this sale will result in additional sales.

The U.S.  Navy  Surface  Weapons  Center has  reported  successful  results from
experiments  using the Plasma  Injector but has released no  information  on the
possibility of more sales to them or regarding commercial  applications of their
technology using the Plasma Injector.

The White Paper  circulated by the Company (a scientific  description of how the
Company's  products work,  written  September 12, 2000 for  distribution  to the
Texas state legislature and selected research  scientists) has resulted in a new
application of the Plasma Injector for use with  alternative  fuels. Dr. Ruggero
Santilli of US MagneGas has read the  Perma-Tune  White Paper and believes  that
the  theory set forth in the paper is  consistent  with his  research  in plasma
theory.  US MagneGas  manufactures  equipment  that creates a clean burning fuel
from crude oil or liquid  petroleum wastes using their own plasma arc technology
(a term employed by US MagneGas to describe the patented  process by which their
equipment  creates a plasma state in the production of MagneGas).  Dr.  Santilli
theorized  that since MagneGas was created in a plasma field, a plasma field may
be needed to burn MagneGas in an automobile engine.

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<PAGE>

Plasma is commonly  referred to as "the fourth  state of matter",  after  solid,
liquid and gas. Plasma is a high temperature,  ionized gas composed of electrons
and  positive  ions  in  such  relative  numbers  that  the  gaseous  medium  is
essentially  neutral.  The  plasma  field is  produced  by a  Perma-Tune  Plasma
Injector by subjecting  the fuel-air  mixture to a sudden blast of  high-Voltage
energy  (32,000 Volts with a rise time of 2  nanoseconds)  which strips  valence
electrons from the fuel-air molecules.

Subsequently,  US MagneGas flew Lonnie  Lenarduzzi to their laboratory in Largo,
Florida to conduct experimentation using MagneGas to power a bi-fuel automobile.
Mr.  Lenarduzzi  installed a Digital  Fire and four Plasma  Injectors on a Honda
automobile, achieving remarkable success. Better performance was achieved in the
experiment  with  Perma-Tune  Plasma  Drives than had ever before been  achieved
using MagneGas in an automobile with any other ignition system.  The exhaust gas
from the test  vehicle  running on MagneGas was analyzed and found to contain no
carbon  monoxide,  elevated oxygen levels and even less  hydrocarbons  than were
measured  in the  surrounding  atmosphere  before  the test.  These  tests  were
performed using a digital read-out,  four-gas analyzer.  This piece of equipment
does not have the capability to produce hard-copy reports.

Installation of a Digital Fire and Plasma  Injectors on older vehicles  consists
of mounting a crankshaft  encoder on the engine and  installing one Digital Fire
to  control  the Plasma  Injectors  (one per  cylinder).  For new  vehicles,  if
desired,  the  existing  controller  can be used  instead  of a Digital  Fire to
control the Plasma Injectors (again, one per cylinder).  If the vehicle is to be
powered by MagneGas,  it would have to be fitted with a gas storage cylinder and
fuel delivery  system  identical to those used on natural-gas  powered  vehicles
currently in use today.

The test results  showing  elevated  oxygen levels and less  hydrocarbons  are a
result  of  two  factors.   1)  Perma-Tune's  Plasma  Injector  technology  more
completely  burns the  fuel-air  mixture in the  vehicle  due to the  ionization
achieved via a plasma field  (described  above) and the initiation of combustion
with an explosion  rather than the spark which is used in conventional  ignition
systems.  2) Chemical reactions  produced by burning MagneGas,  details of which
are the intellectual property of US MagneGas, to which the Company does not have
access.

The experiment demonstrated that existing vehicles can be modified to operate on
both gasoline and MagneGas with the addition of the Plasma  Injector and Digital
Fire to achieve improved performance.

The Company  sold eight  Plasma  Injectors  and two Digital  Fire  systems to US
MagneGas,  one set for the  Honda and  another  set to use in  experiments  on a
four-cylinder generator. Revenues from the Company's work with US MagneGas as of
3/31/01  total  $16,289.66.  Both  companies  have  agreed to  continue  working
together to fully develop  commercial  application  for these  technologies.  US
MagneGas is studying the  possibility  of other uses for the Plasma  Injector in
gas ionization processing equipment that they manufacture.

US MagneGas has reviewed this disclosure and has agreed that it is correct.

                                       25
<PAGE>

As of the second quarter of 2001, the Company is waiting for US MagneGas to make
decisions  on  plans  to  create  commercial  applications  resulting  from  its
successful experimentation using MagneGas with the Company's products. It is not
known at this time if future sales will result from these experiments.

In  preparation  for the planned  fourth  quarter  2001 release of its new Honda
products, the Company has conducted limited R&D activities at a cost of $2951 in
the second quarter, 2001.

A  dynamometer  test was  conducted by a  prospective  Honda client at their own
expense to compare the Perma-Tune model HN010 against the Honda's stock ignition
system at Redline  Performance in the Ft. Worth,  Texas area. No other variables
were changed in this test.  The  customer's  mechanics  conducted the dyno test;
Perma-Tune personnel were not involved in the testing in any way. The purpose of
the test  was to  evaluate  the ease of  installation,  and the  possibility  of
achieving increased performance using the Perma-Tune model HN010.

The mechanics gave the unit high marks for ease of  installation,  and showed by
their dyno  testing  that a 10.2%  increase  in torque and a 16.9%  increase  in
horsepower  were  produced  by  replacing  the  stock  Honda  ignition  with the
Perma-Tune model HN010. Exhaust gas analysis equipment was not available at this
testing facility to quantify the reduction of tailpipe emissions or the increase
in fuel economy produced by the installation of the model HN010. The Company has
received  copies  of the  dyno  test  results,  and has  verified  with  Redline
Performance  that  these  test  result  printouts   accurately  represent  their
findings.

In July 2001,  the Company's  amended  Registration  Statement on Form 10-SB was
cleared of comments by the  Securities  and  Exchange  Commission,  enabling the
Company to apply for quotation on the NASD-regulated  Over-the-Counter  Bulletin
Board. An application is pending for the Company to be approved for listing.


Forward looking statements
--------------------------
This report contains certain  forward-looking  statements  within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities Exchange Act of 1934, as amended. Stockholders are cautioned that all
forward-looking  statements  involve risks and uncertainty.  Although we believe
the assumptions  underlying the forward-looking  statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements contained in the report will
prove to be accurate.


                                       26
<PAGE>

Part II.   OTHER INFORMATION

Item 1.    Legal Proceedings

     None

Item 2.    Change in Securities and Use of Proceeds

On June 12, 2001, the Company sold 20,000 shares of restricted  common stock for
$5,000 ($.25 per share) to Kiowa Oil Company.  The market price on June 12, 2001
was $1.25 per share.  The Company  relied upon the exemption  from  registration
provided by Section 4(2) of the Securities Act.

Item 3.    Defaults Upon Senior Securities

     None

Item 4.    Submission of Matters to a Vote of Security Holders

     Not applicable

Item 5.    Other Information

     Not applicable

Item 6.    Exhibits and Reports on Form 8-K

     (a) Exhibits

         None

     (b) Reports on Form 8-K

         None


                                       27
<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.

                              PERMA-TUNE ELECTRONICS, INC.



                          By: /s/ Linda Decker
                              -------------------------
                              Linda Decker
                              Chief Financial Officer


Date:  August 17, 2001





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