Design teams are commonly formed in engineering courses based on the assumption that diversity leads to more innovative solutions. However, the literature indicates that this assumption is conditional, based on factors such as team effectiveness, individual participation in team decisions, team size, and individuals’ experience level. This also depends on if diversity is defined by age, race, gender, function, or some combination of these factors. The purpose of this study is to investigate the relationship of team diversity, as a function of gender and ethnicity, to team effectiveness, which we argue is a precursor to team innovation. In this study we use a pre-established peer evaluation system, used in a first year engineering course to measure the team effectiveness ratings of 58 three- or four-person teams. We also recorded discussions of two dyads when solving a design problem. ANOVA analysis is used with race and gender as independent variables and team effectiveness as the dependent variable. There was no significant difference between mixed-gender and all-male teams (F(1, 56)=.78, p=.38). However, discourse analysis of two dyads showed that the mixed-gender dyad had more conflicts and had a less structured design process compared to the all-male dyad. The ethnicity data will also be reported in the full paper. Using the results of this study, we will make recommendations on the formation of novice design teams to optimize their effectiveness.