One-pot hydrothermal reduction of graphene oxide (GO) in N-methyl-2-pyrrolidone (NMP) suspension was performed, wherein GO surface were functionalized by free radicals generated from NMP molecules. The NMP functionalized reduced GO (NMPG) nanosheets were then incorporated into epoxy matrix to prepare epoxy composites. The significant improvement of 100 and 240% in fracture toughness (critical intensity factor, KIC) and fracture energy (critical strain energy release rate, GIC) achieved from single edge notched bending (SENB) test revealed the excellent toughening ability of NMPG. The improved compatibility and interfacial interaction between the epoxy matrix and NMPG yielded∼28, 19 and 51% improvement in tensile strength, Young's and storage modulus, respectively. Thermal stability of pure epoxy and its composites was determined at 5, 10 and 50% weight loss, which showed 30, 27.5 and 29 °C improvement with 0.2 wt% NMPG loading. The work provides a simple method to prepare graphene-based epoxy composites with improved performance.