Novel diblock copolymers of poly(E-caprolactone) and polyphosphoester bearing functional hydroxyl pendant groups, denoted as PCL-b-PHEP, were synthesized through ring-opening polymerization of functionalized cyclic phosphoester monomer using hydroxyl end-capped poly(epsilon-caprolactone) and Sn(Oct)(2) as macroinitiator and catalyst, respectively. The chemical structure was proved by H-1, C-13, and P-31 NMR, gel permeation chromatography (GPC), and Fourier transform infrared spectroscopy (FT-IR) analyses. These amphiphilic functionalized block copolymers could self-assemble into micellar or vesicular aggregates in aqueous solution, depending on the composition, which was demonstrated by transmission electron microscopy and confocal laser scanning microscope observations. The critical aggregation concentrations (CAC) of PCL-b-PHEP were also dependent on the composition, measured by the fluorescence probe technique. MTT assay for cytotoxicity of PCL-b-PHEP suggested these polymeric nanoparticles were biocompatible. Combining the advantages of poly(E-caprolactone) and polyphosphoester with functional hydroxyl pendant groups for further biological modification, such amphiphilic block copolymers could potentially provide novel opportunities for design of drug delivery system and therapeutic application.