Blends of the biodegradable polycaprolactone (PCL) and multiwalled carbon nanotubes (MWNTs) were prepared by means of a melt blending method. To conquer the poor compatibility between PCL and MWNTs, the acrylic acid grafted polycaprolactone (PCL-g-AA) and the multihydroxyl functionalized MWNTs (MWNTs-OH) were used as alternatives for the preparation of blends. As the comparison between PCL-g-AA/MWNTs-OH and PCL/MWNTs blends, the former gave much better thermal and mechanical properties than the latter; for examples, 77 degrees C increase in the initial decomposition temperature and 13.3 MPa in the tensile strength at break with the addition of only 5 wt %, due to the formation of ester groups through the reaction between carboxylic acid groups of PCL-g-AA and hydroxyl groups of MWNTs-OH. Finally, the optimal amount of MWNTs-OH was 5 wt % because excess MWNTs-OH caused separation of the organic and inorganic phases and lowering their compatibility. 0 2009 Wiley Periodicals, Inc. J Appl Polym Sci 112: 660-668, 2009