A series of polybutylene-terephthalate/polycarbonate (PBT/PC) blends with different compositions were prepared using a twin-screw extruder. The morphologies of the blends were revealed by scanning electron microscopy (SEM) and transmission electron microscopy (TEM). It was found that a 50/50 PBT/PC blend possessed a bicontinuous structure and the other blends had a dispersed phase of either PBT or PC depending on which was the minor component. A relatively strong interface was observed in the blends with 20%, 40% and 50% PBT; but poor interfacial adhesion was found in the blends with 60% and 80% PBT. The strength of the interfacial boundary was believed to depend on the composition and blending conditions of the individual blend. Fracture experiments showed that the sharp-notch fracture toughness of PC could be significantly increased by mixing with up to 50% PBT without losing its modulus and yield stress. The toughening mechanisms involved in the fracture processes of the blends were studied using both SEM and TEM together with single-edge-double-notched-bend (SEDNB) specimens. It was found that in the toughened blends the growing crazes initiated by the triaxial stress in front of the crack tip were stabilized by the PC domains. The debonding-cavitation mechanism occurred at the PBT/PC interface, which relieved the plane-strain constraint and promoted shear deformation in both PBT and PC. This plastic deformation absorbed a tremendous amount of energy. Crack-interface bridging by the PC domains was clearly verified by the TEM study. Thus, the PC domains not only stabilized the growing crazes they also bridged crack surfaces after the crack has passed by. This effect definitely caused a large plastic-damage zone and hence a high crack resistance. Poor crack resistances of the blends rich in PBT was caused by the poor interfacial adhesion between PBT and PC. In these polymer blends, the growing crazes easily developed into cracks, which subsequently passed through the weak interface of PBT/PC and finally produced fast unstable fracture.