A novel highly epoxidized polysiloxane was synthesized to modify the diglycidyl ether of bisphenol-A (DGEBA). The mechanical and thermal properties as well as the morphology of the cured epoxy resins were examined by tensile testing, impact testing, fracture testing, differential scanning calorimetry (DSC), thermogravimetric analysis (TGA), and environmental scanning electron microscopy (ESEM). The chemical structure of the highly epoxidized polysiloxane (HEPSO) was confirmed by Fourier transform infrared spectroscopy (FTIR), $^{29}Si$ nuclear magnetic resonance spectroscopy ($^{29}Si$ NMR), and gel permeation chromatography (GPC). The $T_g$ increased by approximately $8^{circ}C$ after introducing HEPSO. TGA in air showed that the initial degradation temperature for 5% weight loss ($T_d$ 5%), the temperature for 50% weight loss ($T_d$ 50%) and the residual weight percent at $800^{circ}C$ ($R_{800}$) were increased after introducing HEPSO. The addition of 4 phr HEPSO2 resulted in the highest increase in tensile strength, impact strength and fracture toughness ($K_{IC}$). The morphology of the fracture surfaces show that the miscibility of polysiloxane with epoxy resin increased with increasing epoxide group in HEPSO. The high epoxide groups in HEPSO can react during the curing process, and participate chemically in the crosslinking network. HEPSO is expected to improve significantly the toughness and thermal stability of epoxy resin.