While incorporating project-based exercise is a common practice in software engineering education, few studies have been conducted in investigating how real-world project development influences university studentsí proactive learning and knowledge transformation. This study aims to evaluate the effectiveness of developing real-world projects with industry engagement in encouraging students to apply knowledge to practice and be more proactive in learning. Using a two-group, post-test quasi-experimental design, the performance between the students taking real-world project development and the students in the control group are compared using descriptive statistics, the independent samples t-test and Welch t-test, accordingly. Both the Spearmanís rank-order and Kendallís τ-b are used to examine the relationship between studentsí practical works and the level of knowledge transformation estimated by the students through online surveys. The results suggest that using real-world projects in the classroom can be an effective motivational device for proactive learning and knowledge transformation. Project-based exercise should be both comprehensive and keeping pace with technology development driven by the software industry evolution to be more effective. The direct interaction with stakeholders, dynamic requirements change, employment of Agile methods, self-organising teams, and using challenging real-world projects, are essential in simulating a real-world software development environment in the classroom.