This paper presents a novel approach to design evaluation of portable consumer electronic (PCE) products using augmented reality (AR) based tangible interaction and functional behavior simulation. In the approach, the realistic visualization is acquired by overlaying the rendered image of a PCE product on the real world environment in real-time using computer vision based augmented reality. For tangible user interaction in an AR environment, the user creates input events by touching specified regions of the product-type tangible object with the pointer-type tangible object. For functional behavior simulation, we adopt state transition methodology to capture the functional behavior of the product into a markup language-based information model, and build a finite state machine (FSM) to controls the transition between states of the product based on the information model. The FSM is combined with AR-based tangible objects whose operation in the AR environment facilitates the realistic visualization and functional simulation of the product, and thus realizes faster product design and development. Based on the proposed approach, a product design evaluation system has been developed and applied for the design evaluation of various PCE products with highly encouraging feedbacks from users.