A novel liquid crystalline polyester-polyurethane (LCPU) that contains polyester mesogenic units was synthesized in the present work. Through a careful investigation of the structure and morphology of the LCPU, it was found that the home-synthesized LCPU is a highly birefringent thermotropic nematic liquid crystal. After being blended with bisphenol-A epoxy, the liquid crystalline polymer can, simultaneously, improve the impact strength and the glass transition temperature as well as the tensile strength and the tensile modulus of the blends. It was proved to be an efficient toughening agent for epoxy without the expense of other properties. (C) 2003 Wiley Periodicals, Inc.