Hydrolysis of Ti alkoxide in the presence of inverse micelles containing CdS nanoparticles in their hydrophilic interior results in formation of TiO2/CdS nanocomposites in which the CdS nanoparticles are embedded in a TiO2 matrix with a thickness of less than or equal to 10 nm at the surface of the particles. The primary hydroxyl groups introduced by 2-mercaptoethanol as a capping agent used for preparation of the CdS nanoparticles are considered to play an important role for successful adhesion and growth of the TiO2 layer on the CdS surfaces. TEM observation strongly supports formation of semiconductor-in-semiconductor heteronanostructure by compartmentalized hydrolysis of Ti alkoxide within the inverse micelles in which the surface-capped CdS nanoparticles coexist.