Background: Malaria remains a major public health problem in Ethiopia. Pyrethroid-treated mosquito nets are one of the major tools available for the prevention and control of malaria transmission. PermaNet® is a long-lasting insecticide-treated net (LLIN) recommended by WHO for malaria control. Objective: The objective of the study was to assess utilization and retention of PermaNet® nets distributed for malaria control in Buie and Fentalie districts and monitor the bio-efficacy of the nets using the WHO cone bioassay test procedures. Methods: A cross sectional study was carried out by interviewing household heads or their representative in Buie and Fentalie districts. The two districts were selected based on a priori knowledge of variations on ethnic background and housing construction. Clusters of houses were chosen within each of the study villages for selection of households. 20 households that had received one or more PermaNet® nets were chosen randomly from the clusters in each village. A total of eight used PermaNet® nets were collected for the bio-efficacy test. The bio-efficacy of PermaNet® nets was monitored according to the standard WHO procedures using a susceptible colony of Anopheles arabiensis to deltamethrin. Results: A total of 119 household heads were interviewed during the study. The retention rate of nets that were distributed in 2005 and 2006 season was 72%. A total of 62.2% of the interviewees claimed children under five years of age slept under LLIN, while only 50.7% of the nets were observed to be hanged inside houses when used as a proxy indicator of usage of LLIN. For the bioefficacy test the mean knock-down was 94% and 100%, while the mean mortality rate observed after 24 hr holding period was 72.2% and 67% for Buie and Fentalie districts respectively. Conclusion: The study revealed a moderately high retention of PermaNet® in the study villages and effectiveness of the nets when tested according to the standard WHO procedure.