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Bisphenol‐A‐based difunctional epoxy resin was modified with poly(ether ether ketone) with pendent tert‐butyl groups (PEEKT). PEEKT was synthesized by the nucleophilic substitution reaction of 4,4′‐difluoro benzophenone with tert‐butyl hydroquinone in N‐methyl‐2‐pyrrolidone. Blends with various amounts of PEEKT were prepared by melt‐mixing. All the blends were homogeneous in the uncured state. The glass transition temperature of the binary epoxy/PEEKT blends was predicted using several equations. Reaction‐induced phase separation was found to occur upon curing with a diamine 4,4′‐diaminodiphenyl sulfone. The phase morphology of the blends was studied using scanning electron microscopy. From the micrographs, it was found that PEEKT‐rich phase was dispersed in a continuous epoxy matrix. The domain size increased with the amount of PEEKT in the blends. The increase in domain size was due to the coalescence of the domains after phase separation. Dynamic mechanical analysis of the blends gave two peaks corresponding to epoxy‐rich phase and thermoplastic‐rich phase. The tensile strength and modulus of the blends remained close to that of the unmodified resin, while the flexural properties decreased with the addition of PEEKT to epoxy resin. The fracture toughness of the epoxy resin increased with the addition of PEEKT. Investigation of the fracture surfaces revealed evidences for local plastic deformation of the matrix, crack pinning, crack path deflection, and ductile tearing of PEEKT‐rich phase. Thermogravimetric analysis revealed that the initial decomposition temperature of the blends were close to that of the unmodified resin. Finally, the properties of the blends were compared with other modified PEEK/epoxy blends. © 2007 Wiley Periodicals, Inc. J Polym Sci Part B: Polym Phys 45: 2481–2496, 2007