The main challenge in developing a LED-based projection system is to meet the brightness requirements of the market. Therefore a balanced combination of optical, electrical and thermal parameters must be reached to achieve these performance and cost targets. This paper describes the system design methodology for a digital micromirror display (DMD) based optical engine using LEDs as the light source, starting at the basic physical and geometrical parameters of the DMD and other optical elements through characterization of the LEDs to optimizing the system performance by determining optimal driving conditions. LEDs have a luminous flux density which is just at the threshold of acceptance in projection systems and thus only a fully optimized optical system with a matched set of LEDs can be used. This work resulted in two projection engines, one for a compact pocket projector and the other for a rear projection television, both of which are currently in commercialization.