Biodegradable, lactic acid based amorphous poly(ester-urethane)s (PEU) were modified with poly(l-lactic acid-co-epsilon-caprolactone-urethane) elastomer (P[LA/ CL]U) by melt blending The phase separation of P(LA/CL)U elastomer with three different epsilon-caprolactone (CL) compositions (CL content 30, 50, and 70 mol %) and the mechanical properties of the resulting impact-modified Linear and branched PEU were investigated. The amounts of P(LA/CL)U elastomer in the PEU blends were 10, 15, 20, and 30 wt %. Dynamic mechanical thermal analysis (DMTA) of the blends with P(LA50/CL50)U and P(LA30/CL70)U elastomers revealed separate glass transition temperatures for rubber and matrix, indicating phase separation. No phase separation was found for P(LA70/CL30)U elastomer. The effect of mixing rate and temperature during processing on composite properties was tested by blending P(LA30/CL70)U rubber with PEU under various processing conditions. Impact modification studies were also made with two P(LA30/CL70)U elastomers having different, amounts of functional groups. The influence of end-functionalization and cross-linking on mechanical properties was investigated in blends containing PEU and 15 wt % of these elastomers. Scanning electron microscopy (SEM) showed the morphology to change dramatically with increase in the degree of cross-linking in the rubber. (C) 2000 John Wiley & Sons, Inc.