We have functionalized poly(N-vinyl carbazole) (PVK) by controlled sulfonation. CdS nanocystals of 3-20 nm across were synthesized in the sulfonated PVK matrix with the CdS molar fraction of similar to1-18%. The CdS nanoparticle size increased with the molar fraction of CdS. At high CdS molar fractions, the CdS nanocrystals exist in both cubic and hexagonal phases. Photoluminescence efficiency of PVK decreases when the molar fraction of CdS increases due to quenching through interfacial charge transfer. Photoluminescence attributable to the CdS nanocrystals can be observed only at low molar fractions of CdS. Significant enhancement in photoconductivity induced by the chemical doping of CdS in PVK has also been demonstrated.