This paper reports synthesis and characterization of thermoplastic polyurethane nanocomposites of reactive silicate clays. Pre-polymer (method I) and chain-extended polymer molecules (method II) with residual -NCO groups participated in tethering reactions with clay during clay-polymer mixing. It was found that both clay-polymer reactions and shear stress of mixing are responsible for clay exfoliation. In method I, more clay-tethered polymer chains were produced, but clay particles did not exfoliate due to low shear stress of mixing. Method II provided an order of magnitude higher shear stress of mixing and yielded exfoliated nanocomposites. Control experiments with high shear stress of mixing and no clay-polymer reactions resulted in only intercalated composites. It was found that clay particles deterred hydrogen bonding among hard segments. The exfoliated nanocomposites exhibited optical clarity and more than 100% increase in tensile strength and tensile modulus over pristine polyurethanes. (c) 2005 Elsevier Ltd. All rights reserved.