The thermal, rheological, and mechanical properties of bulk-polymerized thermoplastic polyurethane nanocomposites of reactive and non-reactive layered silicate clay were characterized as a function of the state of dispersion of particles. True exfoliated nanocomposites were produced by mixing reactive clay particles with polymer chains carrying residual isocyanate groups. On the other hand, non-reactive clay particles yielded only intercalated composites. Most significant improvement in mechanical properties were obtained when clay particles were fully exfoliated, e.g. 110% increase in tensile modulus, 170% increase in tensile strength, 110% increase in tear strength, 120% increase in fracture toughness, and 40% increase in abrasion resistance over pristine polyurethane with 5 wt% clay. In addition, the terminal dynamic rheological data showed strong dependence on the clay content, indicating substantial hindrance to chain relaxation by tethering clay particles. The peak location and the area under the peak of hydrogen-bonded carbonyl showed two distinct zones of temperature dependence, which indicate additional hydrogen bonding between polymer chains and organic modifier of reactive clays.