An amphiphilic block copolymer toughener was incorporated into a liquid epoxy resin formulation and self-assembled into well-dispersed nanometer scale spherical micelles with a size of about 15 nm. The nanosized block copolymer at 5 wt% loading can significantly improve the fracture toughness of cured epoxy thermosets without reduction in modulus at room temperature and with only a slight drop in glass transition temperature. The toughening mechanisms were investigated, and it was found that the 15 nm size block copolymer micelles could cavitate to induce matrix shear banding, which mainly accounted for the observed remarkable toughening effect. Other mechanisms, such as crack tip blunting, may also play a role in the toughening. A discussion of the possible reasons responsible for the observed attractive mechanical property improvements due to the block copolymer modification is given. Implications of the present finding for designing toughened polymers are also discussed.