This paper describes the application of Problem-based learning (PBL) to the design and implementation of an E-commerce web site by small groups of software engineering students. This work is part of a real-world software engineering course, taught to pre-internship students. The use of PBL has gained significant interest since its inception in the late 1950's, and its later adaptation to small team-based learning in the early 1960s. By combining the PBL paradigm along with the experience of teaching a 'traditional' software engineering course, and by analyzing feedback from industry, a course, which we believe provides students with new insights into real-world software engineering projects, has been developed. Initially students were formed into teams of 4 or 5 members based on the weak-strong selection technique. The course began with team-building activities, after which the E-commerce project proposal was presented to the teams. The teams were given complete autonomy over their software development strategies but they were required to work with the clients (mentors) to elicit the project requirements and specifications. Emphasis was placed on the methodology employed (the 'how') rather than on the end product (the 'what'). Assessment of the students focused on three main areas, in keeping with the PBL paradigm. Firstly, implementation skills were assessed by examining the final product and documentation provided by the teams. Secondly, teamwork and leadership skills were evaluated through the use of short anonymous self-assessment and team-assessment questionnaires, as well as by their demonstrated ability to organize meetings and manage their team skills. Finally, analytical thinking and inter-personal skills were evaluated through personal journals and a detailed group presentation. The journals outlined their journey through the learning process and demonstrated their ability to identify and analyze critical variables in the development cycle. The presentation was followed by hard-hitting questions based on Bloom's taxonomy from the faculty staff members. This paper details all aspects of the course development and execution and concludes with an evaluation of PBL and its application to software engineering education.