The theory and lessons of knowledge exchange, in both a physical and virtual environment, suggest a framework for understanding the specific requirements for a digital design class in "Second Life". Through teaching and observing students who were asked to complete a machinima project, our research provided examples of the strengths and the weaknesses of using "Second Life" for knowledge exchange. Learning is a process of creating knowledge, and so we observed the input and the output of the process. A literature review of knowledge creation considering the exchange of both tacit and explicit knowledge exchange informs our theory. Teaching occurred both remotely and, in person, in a media lab that included a physical presence of 33 students using networked computers and also allowed virtual presence in "Second Life". The students also experienced a mixed-reality environment in which they collaborated sometimes in close physical proximity and sometimes only together in the virtual space. The exchange of tacit knowledge in a shared physical environment was regarded as a benchmark for knowledge exchange in "Second Life", and we will conclude this article with some suggestions how that could be more closely simulated. (Contains 1 figure.)