A mixture of epoxy with liquid nitrile rubber, carboxyl-terminated (butadiene-co-acrylonitrile) (CTBN) was cured under various temperatures. The cured resin was a two-phase system, where spherical rubber domains were dispersed in the matrix of epoxy. The morphology development during cure was investigated by scanning electron microscope (SEM). There was slight reduction in the glass transition temperature of the epoxy matrix (T-g) on the addition of CTBN. It was observed that, for a particular CTBN content, T-g was found to be unaffected by the cure temperature. Bimodal distribution of particles was noted by SEM analysis. The increase in the size of rubber domains with CTBN content is due probably to the coalescence of the rubber particles. The mechanical properties of the cured resin were thoroughly investigated. Although there was a slight reduction in tensile strength and young's modulus, appreciable improvements in impact strength, fracture energy, and fracture toughness were observed. Addition of nitrile rubber above 20 parts per hundred parts of resin (phr) made the epoxy network more flexible. The volume fraction of dispersed rubbery phase and interfacial area were increased with the addition of more CTBN. A two-phase morphology was further established by dynamic mechanical analysis (DMA). (C) 2004 Wiley Periodicals, Inc.