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Melt reaction in blends comprising immiscible biopolymer, poly(3‐hydroxybutyrate) (PHB), and epoxidized natural rubber with 50 mol percent level of epoxidation (ENR‐50), prepared by solvent‐casting, has been studied. Differential scanning calorimetry (DSC) technique was used to measure the heat of reaction under isothermal annealing. The heat of reaction increases with respect to PHB and ENR‐50 content as long as they constitute the dispersed phases and exhibits a maximum at about 50% PHB. A reaction mechanism comprising degradation of PHB chains to shorter chains bearing carboxyl end groups that subsequently react with epoxide group of the ENR‐50 is proposed, providing the basis for kinetic analysis and determination of parameters that characterize the melt reaction. Two‐phase morphologies, formed in the blends upon melting of PHB, transform within minutes to homogeneous phase as observed under optical polarizing microscope. The two glass transition temperatures observed at –18.4 and 1.2°C for blends are associated, respectively, with immiscible ENR‐50 and PHB phases. After annealing at 190°C an inward shift was observed, gradually closing in with increasing annealing time, and eventually merging into a single transition. This is an indication of progressive change in miscibility of the blends, as an effect of the melt reaction. FTIR spectra provide further evidence that supports the ring opening reaction of the epoxide group by the carboxyl group. © 2004 Wiley Periodicals, Inc. J Appl Polym Sci 95: 113–129, 2005