Glycidol was used to convert the isocyanate-terminated polyurethane prepolymer to glycidyl-terminated polyurethane prepolymer. The modified polyurethane not only offers some distinct advantages over the commercial polyurethane prepolymer, but also enhances the properties of the epoxy resins. The glycidyl-terminated polyurethane modified epoxy resin proved to be superior to conventional epoxy resins in improving impact strength, fracture energy, and adhesion properties. The compatibility of the compounds in this glycidyl-terminated PU/epoxy system was investigated using different preparation procedures. It was found that the synthesized glycidyl-terminated polyurethane prereacted with curing agents, exhibited a lesser degree of phase separation, and can influence the mechanical properties of polymer blends. The results coincide with the phenomena observed in dynamic mechanical analysis and scanning election microscopy.