The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, our financial statements (and notes related thereto) and other more detailed financial information appearing elsewhere in this report. Consequently, you should read the following discussion and analysis of our financial condition and results of operations together with such financial statements and other financial data included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. See also "Forward-Looking Statements" in Item 1A of this report.

Overview

We design, develop and market proprietary high technology electronic systems for sale to automobile and truck original equipment manufacturers. In 2008, we completed our ninth full year of producing and selling our Climate Control Seat™ ("CCS™") product, which provides year-round comfort by providing both active heating and cooling to seat occupants. Since we started commercial production, we have shipped approximately 4,500,000 units of our CCS product to several customers: JCI, Lear, Bridgewater, NHK, Marubeni, Dymos, Faurecia NHK, Faurecia Wuhan, Tacle and Magna. These customers in turn sell our product, as a component of an entire seat or seating system, to automobiles manufactured by Ford Motor Company, General Motors, Toyota Motor Corporation Nissan and Tata Motors, Ltd. Tata Motors, Ltd. features CCS on its Jaguar and Land Rover luxury brands which it acquired from Ford Motor Company in 2008. We also sell directly to Hyundai.

We operate as a Tier II supplier to the auto industry. Inherent in this market are costs and commitments well in advance of the receipt of orders (and resulting revenues) from customers. This is due in part to automotive manufacturers requiring the coordination and testing of proposed new components and sub-systems. Revenues from these expenditures may not be realized for two to three years as the manufacturers tend to group new components and enhancements into annual or every two to three year vehicle model introductions.

During 2008, particularly in the second half of the year, our product revenues were adversely affected by a significant decline in worldwide automotive production levels. During 2008, worldwide light vehicle production declined by 4.3% to 65.6 million vehicles. This drop was even more significant during the second half of the year with which declined by 11.9%. Our product revenues are primarily focused on vehicle production in North America and the Japan/Korea region. During 2008, vehicle production for these regions declined by 16.2% and 2.3%, respectively, as compared to the prior year. This decline has been largely precipitated by a decrease in the sales of light vehicles which is attributable to the global credit crisis and resulting global economic slowdown. During 2008, our revenue levels were relatively flat as compared to the prior year despite the significant reduction in worldwide light vehicle production. We were able to maintain such revenue levels by introducing CCS on several new vehicle platforms that were launched during the year and increasing installation rates of the CCS on existing light vehicle platforms. We expect that there is likely to be even lower light vehicle production levels during 2009 would almost certainly result in our having lower product revenue for the year.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses,

and related disclosures at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. These estimates and assumptions include, but are not limited to:

• Warranty reserves,

• Allowances for doubtful accounts,

• Income taxes,

• Inventory reserves,

• Stock compensation and

• Patents.

Accrued Warranty Costs

We do not offer our customers explicit warranty terms; however, we do honor warranty claims for defective products. We have secured errors and omissions insurance which provides certain coverage for defects in our product designs; however, we do not maintain a product recall insurance policy. Provision for estimated future cost of warranty for product delivered is recorded when revenue is recognized. While we believe our warranty reserve is adequate and that the judgment applied is appropriate, such estimates could differ materially from what will actually transpire in the future. The warranty policy is reviewed by management annually. Based on historical information available to the Company and claims filed to date, which have been minimal to date, the warranty accrual is periodically adjusted to reflect management's best estimate of future claims.

Income Taxes

Our income taxes are determined under guidelines prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the liability method specified by SFAS 109, our deferred tax assets and liabilities are measured each year based on the difference between the financial statement and tax bases of assets and liabilities at the applicable enacted Federal and State tax rates. A valuation allowance is provided for a portion of our net deferred tax assets when we consider it more likely than not that the asset will not be realized. At December 31, 2008 and 2007, a valuation allowance has been provided for an estimated portion of our NOL's generated prior to a 1999 change in control, as defined by the internal revenue code, which limits our ability to utilize those NOL's. At our current rate of taxable income, we expect to utilize the NOLs not subject to this limitation over the next three to five years. If future annual taxable income were to be significantly less than current and projected levels, there is a risk that some of our NOLs not already provided for by the valuation allowance would expire. We do not expect significant differences between our taxable income and our book earnings before income taxes.

As required by Financial Accounting Standards Board ("FASB") Interpretation 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), which clarifies SFAS 109, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

Stock Based Compensation

During 2006, we adopted Statement of Financial Accounting Standard 123R "Share-Based Payment" ("SFAS 123R"). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation expense based upon the fair value on the date of grant. We determine fair value of such awards using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates certain assumptions, such as risk-free interest rate, expected

volatility, expected dividend yield and expected life of options, in order to arrive at a fair value estimate. Expected volatilities are based on the historical volatility of the Company's common stock and that of an index of companies in our industry group. Since the Company has little historical data to help evaluate the expected lives of options, we considered several other factors in developing this assumption including the average holding period of outstanding options, their remaining terms and the cycle of our long range business plan. The risk free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based upon the Company's history of having never issued a dividend and management's current expectation of future action surrounding dividends. We believe that the assumptions selected by management are reasonable; however, significant changes could materially impact the results of the calculation of fair value.

Patent Costs

Our business strategy largely centers on designing products based upon internally developed and licensed technology. When possible we protect these technologies with patents. We capitalize the costs of purchasing, developing and filing new patent applications. These costs consist of legal and filing fees. These costs are then amortized on a straight-line basis over their estimated economic useful life which is generally 17 years. We periodically review the recoverability and remaining life of our capitalized patents based upon market conditions, competitive technologies and our projected business plans. Changes in these conditions could materially impact the carrying value for our capitalized patents.

Results of Operations Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Product Revenues. Product revenues of $63,613,000 for 2008 were level with revenues of $63,630,000 for 2007. Higher sales resulting from new model introductions and higher penetration on certain programs were offset by lower volumes on existing programs. Unit shipments were 931,000 units for 2008 and were 939,000 units in 2007. New vehicles equipped with CCS and launched since the end of 2007 included the, Nissan Teana, Nissan Maxima, Infiniti FX, Jaguar XJ, Jaguar XF, Lincoln MKS, Ford F150 Pickup, Chevrolet Suburban, Chevrolet Tahoe, Chevrolet Avalanche, GMC Yukon, GMC Yukon XL, GMC Yukon Denali and the GMC Sierra Pickup. Two programs launched during 2007 had higher revenue in 2008 due to the impact of full year shipments; the Hyundai Genesis and Lexus LX 570. Two vehicles, beginning with the 2008 model year, began to install the CCS as a standard feature; previously, the CCS was installed on these vehicles at the option of the car buyer. Offsetting these increases were volume decreases on existing programs due to declining overall automotive market volume which has been impacted by slowing worldwide economic activity, higher gas prices and decreasing availability of consumer credit. We estimate that the impact of these lower volumes was to reduce product revenues by approximately $20,000,000 to $25,000,000.

Cost of Sales. Cost of sales increased to $45,086,000 for 2008 from $42,302,000 for 2007. This increase of $2,784,000, or 7%, is attributable to higher raw material costs and an unfavorable change in the mix of products sold which favored programs having a lower gross margin percentage during 2008 compared with 2007. The gross profit percentage during 2008 was 29% and was 34% during 2007. TED's, which represent the key component of the CCS system, contain the metal Tellurium ("Te"). During the early months of 2008 the market for Te experienced a significant increase. The average price of a kilogram of Te in 2007 was approximately $100 and increased to a peak of $286 in April 2008. Since that time the average market price has continually decreased to an average of $200 per kilogram during December 2008. We do not purchase Te directly but have agreed to price increases for our TED suppliers as a result of the increase in their Te costs. Existing Te supply contracts and on-hand inventory resulted in a delay in the impact of higher Te market prices to us until the third quarter of 2008. Although the market for Te has moderated, we expect that the lower levels will not result in reduced costs to Amerigon until at least the third quarter 2009.

Net Research and Development Expenses. Net research and development expenses increased to $6,783,000 for 2008 from $5,081,000 for 2007. This $1,702,000, or 33%, increase was due to increased research activities associated with our advanced TED program, the addition of CCS engineering resources to support the

large number of new vehicle programs and continued development of new automotive and non-automotive TE-based products. The increase in research and development expenses for our advanced TED program is associated with a recent breakthrough in our TED material program. With support from our subsidiary, BSST LLC, a scientist at The Ohio State University recently developed a new efficient TED material having certain desirable properties at high temperatures. Much of our higher research and development expenses are focused on further advancing and commercializing that new material. Our research and development reimbursements have not increased proportionately to the increase in research and development expenses due to an increasing focus on efficient TED material, including that from The Ohio State University, and production process technology advancements for which we do not plan to seek partnership support.

We classify development and prototype costs and related reimbursements as research and development. This is consistent with accounting standards applied in the automotive industry. Depreciation costs for tooling are included in cost of sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $7,190,000 for 2008 compared with $8,542,000 for 2007 representing a decrease of $1,352,000 or 16%. This decrease is primarily related to a reduction in management bonuses for 2008.

Interest Income. We had interest income of $837,000 for 2008 compared with $961,000 for 2007. The decrease of $124,000, or 13%, resulted from lower average yields on our interest paying investments offset partially by higher average cash equivalent and short-term investment balances during 2008 compared with 2007 (see "Liquidity and Capital Resources").

Income Tax Expense. We recorded income tax expense of $1,938,000 during 2008. This reflected an estimated effective tax rate for the year of 35%. Our current income tax expense is expected to be substantially offset by our net operating loss carry forwards. Therefore, we do not expect to have a significant cash outlay for income taxes in the current year. At the end of 2008, our remaining available Federal NOL's totaled $12,706,000. During 2007, we recorded an income tax expense totaling $3,170,000 representing our normal tax provision and an effective tax rate of 36%. This was partially offset by a benefit recorded for prior year R&D Credits totaling approximately $1,700,000 which decreased our effective tax rate to 17%. We recorded these R&D Credits as a result of having substantially completed a detailed analysis during the third quarter of 2007 which substantiated and quantified our ability to claim the credits.

Results of Operations Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Product Revenues. Product revenues for 2007 were $63,630,000 compared with revenues of $50,609,000 for 2006, an increase of $13,021,000, or 26%. Higher sales were primarily the result of new model introductions and higher volumes on redesigned models. These increases were partially offset by lower sales for three models for which the production life ended during or after 2006, lower average unit prices and lower volumes on existing programs. Unit shipments increased to 939,000 units for 2007 compared with 718,000 units for 2006. New products equipped with CCS and launched during 2007 included the Jaguar XJ, Jaguar XF, Hyundai Genesis, Lexus 600HL, Lexus LX 570 and the Lincoln MKX. Additionally, four models, the redesigned Cadillac Escalade, Cadillac Escalade ESV and Cadillac EXT, and the Land Rover Range Rover, were introduced during 2006 but did not reach full volume levels until the third or fourth quarter of 2006. Lower average prices per unit were the result of a change in the mix of products sold being weighted more to CCS systems having lower Amerigon content during 2007 compared with that of 2006. Content varies among programs based upon differing customer sourcing decisions for certain components that complement the CCS system. The three vehicles which ended their production life during or after 2006 were the Cadillac Escalade ESV Platinum, Lincoln LS and Mercury Monterey. Replacements for these models were not introduced by our customers. Since June 30, 2006, we began shipping product for three vehicles currently offering CCS that were totally redesigned: the Lincoln Navigator, Ford Expedition and Lexus LS460.

Cost of Sales. Cost of sales increased to $42,302,000 during 2007 (66%, as a percentage of product revenues) from $34,109,000 during 2006 (67%, as a percentage of product revenues). This increase of $8,193,000, or 24%, is attributable to higher unit sales volumes offset partially by a favorable change in the mix of products sold and better coverage of fixed costs.

Net Research and Development Expenses. Net research and development expenses increased to $5,081,000 during 2007 from $3,367,000 during 2006. This $1,714,000, or 51%, increase was primarily due to increased research activities associated with our advanced TED program and lower research and development reimbursements. The lower research and development reimbursements reflect a reduction in our partnership activities with Visteon Corporation ("Visteon").

On June 29, 2007, our subsidiary BSST amended its exclusive development agreement with Visteon related to certain proprietary TED technology for automotive applications, permitting BSST to undertake further development with a limited number of additional development partners. Under the terms of the amendment, BSST acquired Visteon's Thermoelectric-based HVAC systems technology and is now permitted to seek additional partners in Asia and Europe. The cost of the acquisition of these Visteon patents was $1,500,000 and has been capitalized as Patent Costs on the Consolidated Balance Sheet as of December 31, 2007. BSST is now working to select additional development partners to expand the market for Theremoelectric-based HVAC systems in the automotive market. Until these new partnerships are consummated, BSST's research and development reimbursements will be reduced and Amerigon will fund a more significant portion of BSST's operations. We are aggressively focused on cost reductions at BSST to minimize its funding requirements until new partnerships are finalized.

We classify development and prototype costs and related reimbursements as research and development. This is consistent with accounting standards applied in the automotive industry. Depreciation costs for tooling are included in cost of sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $8,542,000 during 2007 compared with $7,620,000 during 2006. This $922,000, or 12%, increase principally reflects higher costs in our marketing department of $314,000, higher costs of the management incentive plan of $390,000 and other increases in administrative expenses. We increased the size of our marketing staff, incurred greater travel costs and moved into a larger Tokyo office as we prepared for a significant number of new program launches expected in 2008 and beyond. Due to the nature of our industry, our marketing team is primarily focused on activities associated with securing future business and less on managing existing product orders.

Interest Income. We had interest income of $961,000 during 2007 compared with $523,000 during 2006. The increase of $438,000, or 84%, resulted from higher cash and short-term investment balances during 2007 compared with 2006 and higher average yields on our cash investments (see "Liquidity and Capital Resources" below).

Income Tax Expense. We recorded an income tax expense totaling $3,170,000 representing our normal tax provision and an effective tax rate of 36% during 2007. This was partially offset by a benefit recorded for prior year R&D Credits totaling approximately $1,700,000 which decreased our effective tax rate to 17%. We recorded these R&D Credits as a result of having substantially completed a detailed analysis during the third quarter of 2007 which substantiated and quantified our ability to claim the credits. The income tax expense for 2006 was $2,693,000 representing an effective tax rate of 43%. During the year ended December 31, 2006, the Company reduced its deferred tax assets related to state net operating losses in order to reflect these assets at their proper carrying amount. The effect of this matter increased income tax expense by approximately $215,000 and our effective income tax rate by approximately 3.5% for the year ended December 31, 2006.

Liquidity and Capital Resources

The following table represents our cash and cash equivalents and short-term investments:

                                          December 31,     December 31,
                                              2008             2007
                                                 (in Thousands)
             Cash and cash equivalents   $       25,303   $        1,170
             Short-term investments                   -           23,925

                                         $       25,303   $       25,095

We manage our cash, cash equivalents and short-term investments in order to fund operating requirements and preserve liquidity to take advantage of further business opportunities. Cash and cash equivalents increased by $24,133,000 to $25,303,000 in 2008. We liquidated all our short-term investments during 2008.

Cash provided by operating activities during 2008 was $5,545,000 and was attributable to net income of $3,564,000, plus non-cash adjustments. Non-cash adjustments primarily included deferred taxes of $1,432,000, depreciation and amortization of $1,373,000 and stock option compensation of $1,109,000. These were offset partially by an increase in net operating assets and liabilities of $1,861,000. The higher net operating assets and liabilities were primarily due to higher inventory and by lower accounts payable and accrued liability balances at December 31, 2008, compared with December 31, 2007. These were partially offset by lower accounts receivable and lower prepaid expenses and other assets.

As of December 31, 2008, working capital was nearly unchanged at $30,471,000 as compared to $30,538,000 at December 31, 2007. Increases in cash and cash equivalents and inventory of $24,133,000 and $421,000, respectively and decreases in accounts payable and accrued liabilities of $4,767,000 and $455,000, respectively, were partially offset by decreases in short-term investments, accounts receivable and current deferred income tax assets of $23,925,000, $3,603,000 and $2,978,000, respectively. Accounts receivable decreased primarily as a result of a $3,564,000 decrease in product revenues during the fourth quarter of 2008 compared with product revenues in the fourth quarter of 2007. Our levels of inventory and accounts payable tend to fluctuate as a result of sourcing products from China and long payment terms with certain suppliers. Our inventory levels were higher at the end of the second and third quarters of 2008 in anticipation of much higher product revenue volumes which did not materialize. We reduced our inventory levels during the fourth quarter to levels more suited to current volume levels. This fluctuation in inventory levels resulted in much lower accounts payable levels at December 31, 2008 since much of our product revenue shipments during the fourth quarter came from existing on hand inventory and not from purchases from suppliers.

Cash provided by investing activities was $21,368,000 during 2008, reflecting sales and maturities of short-term investments of $27,025,000, offset partially by purchases of short-term investments of $3,100,000, purchases of property and equipment totaling $1,712,000, cash paid to acquire new patents and patent application filings of $654,000 and cash invested in corporate owned life insurance of $191,000. Purchases of property and equipment for the period are primarily related to new equipment purchases for newly launched production program.

Cash used in financing activities was $2,893,000 during 2008, representing the cash used to repurchase common stock pursuant to the stock repurchase program described below totaling $3,497,000 offset partially by proceeds of Common Stock option exercises of $604,000.

On October 28, 2008 we announced that our Board of Directors had authorized a stock repurchase program. Under the program, we may repurchase, from time to time, up to $12,000,000 of our Common Stock in open market or in privately negotiated transactions for a period of 12 months. The number of shares and the timing of the purchases are determined by our management based on market conditions, share price and other factors. The

stock repurchase program does not require us to repurchase any specific dollar value or number of shares and may be modified, extended or terminated by the Board of Directors at any time. The repurchase program is funded using our available cash. During the fourth quarter of 2008 we repurchased 946,877 shares of Common Stock at an aggregate purchase price of $3,497,000.

We have a $20,000,000 credit line ("Revolving Credit Line") with Comerica Bank to fund future working capital requirements. At December 31, 2008, no revolving loans were outstanding. A Borrowing Base, as defined by the credit agreement, limiting the loans available under the Revolving Credit Line is effective when aggregate loans exceed $10,000,000. The Borrowing Base is equal to 85% of Eligible Domestic accounts receivable, as defined by the agreement, plus the lesser of 60% of Eligible Foreign accounts receivable, as defined by the agreement, or $3,000,000 plus 50% of Eligible Inventory, as defined by the agreement, plus 70% of the market value of Eligible Securities, as defined by the agreement. The Revolving Credit Line also provides for a letter of credit sub-facility of $5,000,000. At December 31, 2008 outstanding letters of credit were $165,000. At December 31, 2008 the Borrowing Base was less than $10,000,000 and $9,835,000 was available under the Revolving Credit Line. Loans under the Revolving Credit Line can be made, at the election of the Company, as Prime-based loans or Eurodollar-based loans. Interest is payable in arrears quarterly on Prime-based loans, and in arrears of one, two or three months on Eurodollar-based loans, determined by the length of the Eurodollar-based loan, as selected by the Company. Prime-based loans bear interest at Comerica Bank's prime rate (3.25% at December 31, 2008). Eurodollar-based loans bear interest at a variable rate plus an applicable margin as outlined in the Revolving Credit . . .