An interesting way to obtain compatible blends of poly(c-caprolactone) (PCL) and polystyrene-b-poly(ethylenepropylene) (PS-PEP) has been achieved. The intrinsically immiscible blends such as PCL/PS and PCL/PEP become compatible while the PS and PEP components form a diblock copolymer to melt blending with PCL. The morphology of PCL/PS-PEP blends was examined by polarized light microscopy, small-angle X-ray scattering, and transmission electron microscopy (TEM). The PCL/PSP-EP blends were found to self-assemble as lamellar microstructure with tens of nanometers dimension. Their compatibilities were investigated in terms of differential scanning calorimetry. No significant change on the T-g of PEP-rich phase in the blends has been found whereas the T-g of PS-rich phase gradually decreases with decreasing the molecular weight of PCL in blends. However, the changes on the T-g of PS are insignificant as compared to the expected glass transition temperature predicted by the Fox equation. Taking advantage of the driving force of self-assembly for block copolymers, the PCL component appears to be localized in between the lamellar microdomains of PS block. The behavior of localization for PCL was further confirmed by the TEM phase contrast imaging. Contrary to typical microphase-separated morphology of crystallizable block copolymers (designated as chemically confined environment for crystallizing blocks), we name this unique phase-separated morphology as a physically confined environment for the crystallization of PCL.