Carbon fiber (CF) containing 1.4 and 2.1 mmol/g of -COOH and -OH groups, respectively, was functionalized by using an excess of tolylene-2,4-diisocyanate. The NCO-modified CF was submitted to a graft reaction with hydroxyl-terminated polybutadiene (HTPB). The HTPB-grafted carbon fiber was employed as reinforcing agent for epoxy resin-based composites. The presence of the flexible HTPB at the interface between the fiber and the matrix resulted in a substantial improvement on impact strength. Additional improvement on toughness was achieved by using epoxy matrix containing dispersed phase of HTPB. The composite morphology was also studied by scanning electron microscopy.