Thermoplastic starch (TPS) and polylactic acid (PLA) were compounded with natural montmorillonite (MMT) using a twin-screw extrusion process to investigate the structure and properties of these nanocomposites and to examine the use of water to enhance clay exfoliation. Tensile and essential work of fracture measurements were performed on standard dumbbell shape samples and on double notched samples to determine the effect of MMT and PLA/TPS interfacial modification on the mechanical and fracture properties of the materials. The nanocomposite structure was investigated using X-Ray diffraction, transmission electron microscopy, and atomic force microscopy. Differential scanning calorimetric analysis was performed on the materials to determine the effect of TPS and MMT on PLA crystallization and physical aging. It was found that the TPS can intercalate the clay structure and that the clay was preferentially located in the TPS phase or at the blend interface. This led to an improvement in tensile modulus and strength and to a reduction in fracture toughness.© 2009 Society of Plastics Engineers.