Polycaprolactone (PCL) was grafted onto starch through introduction of urethane linkages. The grafting reaction was carried out in two steps. The first step was the reaction of hydroxyl-terminated PCL with 2,4-tolylene diisocyanate. The isocyanate terminated PCL was then reacted with starch to obtain starch-graft-polycaprolactone (starch-g-PCL). The grafting reaction was confirmed by FT-IR spectroscopy. The compatibility of the starch/PCL blend was enhanced with a compatibilizer, starch-g-PCL, whose amount was 3 wt.-% of the blend. The tensile strength and morphology of the compatibilized blend were determined. It was found that the compatibilized starch/PCL blend has finer phase domains and an improved interfacial adhesion. Mechanical properties of the compatibilized blend were found to be significantly higher than those of the corresponding uncompatibilized starch/PCL blend.