Toughening of epoxy cresol novolac resin (ECN) by carboxy terminated acrylonitrile-co-butadiene (CTBN) liquid functional rubber have been studied. Wide angle X-ray scattering (WAXS) has been utilized to evaluate average molecular interchain spacing (< R >) from the strong maximum in the diffraction scan using Bragg＇s equation. The half-width (< HW >) of the maximum was used to qualitatively describe the distribution of < R >. An increase in < R > value signifies formation of a separate packing order as well as increase in the free volume. Fouler transform infrared spectroscopy (FTIR) studies convincingly establish that the interaction between oxirane group of epoxy and carboxyl group of CTBN are responsible for characteristic peak shifts in the blends compared to individual polymers. Physicomechanical properties of the blends e.g., the tensile, flexural and impact strengths showed an optimum concentration of CTBN (10 wt%) into ECN, which can offer maximum toughening. Cross sections of the composite specimens failed during impact testing have been critically studied through scanning electron microscopy (SEM) to gain insight into the mechanism of toughening and phase morphology.