Polyol or polysiloxane thermoplastic polyurethanes (TPU) were used to reduce microcracking in cresol-formaldehyde novolac epoxy resin cured with phenolic Novolac resin for electronic encapsulation application. A stable dispersion of TPU particles in an epoxy resin matrix was achieved via the epoxy ring opening with isocyanate groups of urethane prepolymer to form an oxazolidone. The effects of structure and molecular weight of TPU in reducing the stress of electronic encapsulant were investigated. The mechanical and dynamic viscoelastic properties and morphologies of TPU modified epoxy networks were also studied. A "sea-island" structure was observed via SEM. The dispersed polysiloxane TPU rubbers not only effectively reduce the stress of cured epoxy resins, by reducing flexural modulus and the coefficient of thermal expansion, but also increase the glass transition temperature because of the rigid oxazolidone structure formation. Electronic devices encapsulated with the polysiloxane TPU modified epoxy molding compounds exhibited excellent resistance to the thermal shock cycling test and resulted in extended device life.