A commercially viable compatibilizer system containing poly(diphenylmethane diisocyanate) (PMDI) and stearic acid was developed for improving the interfacial adhesion between wood and polyethylene (PE). The treatment of PE with PMDI before mixing with wood increased both the modulus of rupture (MOR) and the modulus of elasticity (MOE) of the resulting wood-PE composites. Addition of stearic acid at certain dosages further increased MOR of the resulting composites. The PMDI-stearic acid compatibilizer system was more effective in increasing both the MOR and MOE of the resulting wood-PE composites than maleic anhydride-grafted polyethylene (MAPE), a commonly used commercial compatibilizer. The compatibilization mechanisms for the PMDI-stearic acid system were investigated by Fourier transform infrared (FT-IR) spectroscopy. The water-resistance test revealed that the composites with the PMDI-stearic acid system were statistically more water-resistant than those with MAPE.