A functionalized graphene sheet (FGS), which was prepared by the thermal reduction of graphite oxide, was modified by oxidation with H2O2. Elemental analysis, X-ray photoelectron spectroscopy, and Fourier transform infrared (FTIR) spectroscopy showed that additional oxygen functional groups, either doubly or singly bound to carbon, were created by the oxidation. The size and electrical conductivity of the FGS were reduced by the oxidation. During FGS/Polycaprolactone (PCL) nanocomposite preparation by an in situ polymerization method, PCL was grafted onto a FGS by chain growth from a functional group on FGS such as hydroxyl. Thermogravimetry and FTIR spectra demonstrated that the amount of grafted polycaprolactone (PCL) was decreased by the oxidation of FGS, suggesting that PCL chain growth from the FGS surface was inhibited by the neighboring carboxylic acid group on the FGS. Enhanced compatibility between the oxidized FGS and the PCL matrix was observed by optical microscopy and scanning electron microscopy. The reinforcing effect on tensile properties was also enhanced by the oxidized FGS in the FGS/PCL nanocomposites. This suggests that the surface coverage by the grafted PCL chains on the oxidized FGS is higher than that on a pristine FGS, although the grafted PCL chain length is shorter and the amount grafted is smaller.