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In this paper, we present an innovative method of teaching digital system design in an undergraduate electrical and computer engineering curriculum. We present a project-based approach to teaching digital system design as opposed to the traditional method that uses conventional classroom lectures with short laboratory exercises. In our approach, students are exposed to a series of industrial-like, semester-long projects that cover fundamental topics in digital system design such as combinational circuit design, sequential circuit design, state machine design, etc. These projects are carried out in groups, thereby developing the students' abilities to work in teams. We present evidence that this project approach offers benefits such as increased student interest and better retention. Currently, 62 percent of our senior design projects are directly related to the concepts presented in this innovative course.