It has been reported that the addition of liquid rubbers, like poly(dimethylsiloxane) (PDMS), to epoxy resins alter the final morphology, increase the toughness and influence the curing kinetics. Due to immiscibility, there is phase separation of the elastomeric phase during curing giving rise to microdomains embedded in the epoxic matrix. The resultant heterogeneous morphology obtained after the reaction controls to an important extent the properties of the epoxy composite. Here we report a method to obtain well-dispersed rubber nanodomains of silyl-diglycidyl ether terminated polydimethyl siloxane (PDMS-DGE) in diglycidyl ether of bisphenol-A (DGEBA) epoxy by using a prepolymerization step. Light scattering and optical microscopy showed that initial mixing of pre-polymerized rubber produced phase separation with micron-scale droplet formation. However, as the curing reaction proceeded, the rubber domains decreased below optical resolution, light scattering intensity reached a maximum and then decreased. Finally, rubber nanodomains of about 100 nm size were formed at the end of curing reaction, as revealed by transmission electron microscopy (TEM). The pre-polymerization step induced a two-fold increase in gel time, tgel, due to lesser active groups available for reaction. Strikingly, tensile modulus and toughness increased, suggesting rubber-epoxy interaction. The final nanocomposite also exhibited higher thermal stability and char formation.