A new kind of reactive toughening agent, defined as liquid crystalline polyurethane (LCPB), having both flexible chain and rigid biphenyl mesogenic groups was synthesized by polyaddition of 2,4-toluenediisocyanate (TDI) with diethylene glycol and 4,4'-dihydroxybiphenyl in DMF. The structure and morphology of the LCPB were investigated systematically by Fourier transform infrared spectroscopy (FTIR), differential scanning calorimetry (DSC), wide angle X-ray diffractometry (WAXD) and polarizing optical microscopy (POM), respectively. The POM observation confirmed that the LCPB exhibited nematic texture and good mesophase stability. The LCPB was used to modify the epoxy resin as toughening agents. The mechanical properties, dynamic mechanical behaviour, fracture surface morphology and apparent activation energy (E-a) of the modified systems were systematically investigated. The experimental results revealed that the impact strength of the epoxy resin modified with LCPB reached the highest value of 47.21 kJ/m(2), and it is 1.8 times higher than that of the unmodified system when the content of LCPB loading reached 5 wt%. In addition, the tensile strength and the fracture strength also enhanced with increasing concentration of LCPB. The DMA results showed that the storage modulus in rubbery state and glass transition temperature (T-g) of the modified systems were higher than those of the unmodified system, indicating that the motion of epoxy matrix chains was strongly restricted by the rigidity of mesogenic units, while the E-a at glassy relaxation process of modified system was about 100-120 kJ/mol higher than that of the unmodified system. The effects of reinforcement on mechanisms of the damaging process of the modified systems were investigated by scanning electron microscopy.