Barrier islands are a primary coastal defense and often experience erosion during storms. When they fail due to storm-induced breaching, there can be significant changes to the small- and large-scale hydrodynamics and morphodynamics of the region. In this study, we explore the formation of a breach on Hatteras Island, North Carolina, during Isabel (2003) and the subsequent flooding into Pamlico Sound. Two-way coupling of high-fidelity, high-resolution numerical models for coastal erosion and flooding enables a better understanding of the formation of the breach, as well as scenarios of the breach’s effects on the circulation in the region. The breach connecting the ocean to the sound formed during the day of landfall. It is shown that, during the storm, overwash and inundation from the ocean led to deterioration of the beach and dunes, and then after the storm, the creation of channels through the island was sensitive to elevated water levels in the lagoon. Then flooding scenarios are considered in which the ground surface of the hydrodynamic model was (a) static, updated with the (b) pre- and post-storm observations, and updated dynamically with (c) erosion model predictions and (d) erosion model predictions with elevated lagoon-side water levels. The model results show that the breach has region-scale effects on flooding that extend 10 to 13 km into the lagoon, increasing the local water levels by as much as 1.5 m. These results have implications for similar island-lagoon systems threatened by storms.