Biodegradable polycaprolactone (PCL) was melt-compounded in a Werner & Pffeiderer twin-screw extruder (ZSK25) together with wood flour (WF) and lignin with maleic anhydride-grafted polycaprolactone (PCL-g-MA) used as a compatibilizer. The grafting of maleic anhydride onto PCL was achieved with reactive extrusion in the presence of 2,5-dimethyl-2,5-di-(t-butylperoxy)hexan as an initiator. The graft copolymers were analyzed with size exclusion chromatography and titration. As a function of the initiator and maleic anhydride addition, the grafted maleic anhydride content varied from 1.4 to 3.1 wt %. Compounds compatibilized with PCL-g-MA exhibited improved mechanical properties: a compatibilized PCL compound containing 40 wt % WF gave a Young's modulus of 2300 MPa with respect to 400 MPa for neat PCL and a 100% increase in yield stress. The content of WF, lignin, and PCL-g-MA was varied systematically to examine stress-strain and impact behavior. Low contents of grafted maleic anhydride and PCL-g-MA were required to improve both mechanical properties and interfacial adhesion. Biodegradation was investigated. Lignin addition was found to retard biodegradation.