Poly(ethylene terephthalate) (PET) and acrylate rubber (ACM) were solution blended in nitrobenzene, a common solvent, at 160 degrees C. The blend film (50/50 weight ratio) was heated at 300 degrees C for different times to induce trans-esterification reaction between the two components and the extent of the reaction was characterized by i.r. spectroscopy. The effects of the reaction on the thermal, dynamic mechanical and tensile properties of the blends were studied. The results confirm the possibility of trans-reaction between PET and ACM components at 300 degrees C up to 45 min, after which the degradation of the phases is predominant. Better mechanical properties support the in situ compatibilization of the two phases via trans-reaction, which increases the adhesion between the two components at interface.