A range of exchange-coupled two-phase nanocomposites composed of hard magneticSm2Fe17N3and soft magnetic &agr;-Fe was prepared by mechanical alloying with a view to optimizing the hysteresis loop shape. The main variables were the crystallization conditions, the nitriding treatment, and the chemical additives. A model of the diffusion of nitrogen in the two-phase nanocomposite is proposed that explains how the presence of Fe permits the nitrogenation of samples at lower temperatures than in single phaseSm2Fe17materials. Studies of samples both resin bonded and cold compacted measured in open and closed circuits revealed that the correct choice of demagnetizing factor used to correct demagnetizing fields depends critically on the sample density. Transmission electron microscopy (TEM) studies of the materials prepared revealed grain sizes in the range 10–50 nm. The shape of the magnetic hysteresis loop and resulting magnetic properties reflects the grain size of both phases. Image analysis of high resolution scanning electron microscopy micrographs of etched samples showed that in general two to three soft grains cluster together and are surrounded by hard grains, but the grain sizes of both phases were found to be the same. The crystallization of the hard phase from the mainly amorphous precursor is the primary factor determining grain size. Zr and Ta were the most successful additives in controlling the grain growth during crystallization, reducing the grain size from 20–30 to 10–20 nm. High resolution TEM indicated the presence of a grain boundary phase between the crystallites of the two phases. This phase was confirmed in Mo¨ssbauer studies of samples where it seems to constitute 15 vol &percent; of the samples and has a significant effect on the coupling between the two phases. Susceptibility measurements are an effective indicator of the degree of coupling between the hard and soft magnetic phases. ©1997 American Institute of Physics.