A stable dispersion of polysiloxane thermoplastic polyurethane (TPU) particles in an epoxy resin matrix was achieved via epoxy ring opening with the isocyanate groups of urethane prepolymer to form an oxazolidone. The effects of the structure and molecular weight of the polysiloxane TPU in reducing the stress of electronic encapsulants were investigated. The mechanical and dynamic viscoelastic properties of polysiloxane TPU-modified epoxy networks were also studied. A phase-separated structure was observed via scanning electron microscopy. The dispersed polysiloxane TPU rubbers effectively reduce the stress of cured epoxy resins by reducing the flexural modulus and the coefficient of thermal expansion, while the glass transition temperature is increased because of the formation of the rigid oxazolidone structure. Electronic devices encapsulated with the polysiloxane TPU-modified epoxy moulding compounds have exhibited an excellent resistance in the thermal shock cycling test and have resulted in an extended device used life.