Epoxy/clay nanocomposites with a better exfoliated morphology have been successfully prepared using a so-called "slurry-compounding" process. The microstructures of the nanocomposites (epoxy/S-clays) were characterized by means of optical microscopy and transmission electron microscopy (TEM). It was found that clay was highly exfoliated and uniformly dispersed in the resulting nanocomposite. Characterizations of mechanical and fracture behaviors revealed that Young's modulus increases monotonically with increasing the clay concentration while the fracture toughness shows a maximum at 2.5 wt % of clay. No R-curve behavior was observed in these nanocomposites. The microdeformation and fracture mechanisms were investigated by studying the microstructure of arrested crack tips and the damage zone using TEM and scanning electron microscopy (SEM). The initiation and development of microcracks are the dominant microdeformation and fracture mechanisms in the epoxy/S-clay nanocomposites. Most of the microcracks initiate between clay layers. The formation of a large number of microcracks and the increase in the fracture surface area due to crack deflection are the major toughening mechanisms.