A novel microbial transglutaminase-catalyzed aqueous-organic biphasic reaction system was successfully developed to prepare caseinate derivatives by cross-linking and incorporating nonpolar octyl tails for the first time. SDS-PAGE and (1)H NMR analysis confirmed that cross-linking and octyl conjugation occurred simultaneously. The octyl substitution degree (SD) was measured by (1)H NMR and used as an index to determine a suitable reaction condition. It was found that at the condition of 0.125% (w/v) protein concentration and 6 h of reaction time, the modified caseinate had the highest SD of 28.96%. The modified caseinate also had an increased surface hydrophobicity, better emulsifying activity, and improved thermal and salt stabilities. However, its emulsion stability or in vitro enzymatic digestibility was slightly lower than that of the native caseinate.