A pelletizing machine for forming pellets from extruded material includes an extruder having at least one exit port and a body defining a cutting chamber through which high-temperature liquid flows, flooding the cutting chamber. The exit port of the extruder opens into the cutting chamber, which includes a cutting section defining a flow path for liquid through the cutting section. A cutter in the cutting section of the cutting chamber is mounted for rotation about an axis generally perpendicular to the first direction and disposed for cutting the extruded material exiting the exit port into the pellets. The axis of rotation of the cutter is parallel to or coincident with the flow path of the cutting section. A method for forming pellets of thermoplastic material with a foaming agent is also disclosed.