A biphenol-type epoxy resin, which has a mesogenic group in the backbone moiety, was modified with a reactive elastomer (CTBN). Toughness of the epoxy resin was significantly increased with the addition of the CTBN elastomer compared with that of the bisphenol-A type epoxy resin. It was clearly observed by SEM that a large plastic deformation occurred near the crack-tip in the biphenol-type epoxy resin modified with CTBN. The arrangement of the network chains in the plastic deformation region was quantitatively studied by polarized microscopic FT-IR technique, which was related to the toughening mechanism of the elastomer modified epoxy resin.