Reactive processing of blends of poly(butylene terephthalate) (PBT) with the ethene-(methyl acrylate)-(glycidyl methacrylate) terpolymer (E-MA-GMA) is known to present a very complex reactivity since two competitive reactions take place spontaneously during melt blending, that is, blend compatibilization and rubber-phase crosslinking. In this article, the effects of several processing parameters, such as the shear rate, the processing temperature, and the matrix viscosity, on the reactive processing of those blends were investigated in terms of the blend morphology and of the amount of copolymer formed at the blend interface. It was shown that the morphology development could be divided in two successive regimes: In the early stages of the mixing process, the particle size is essentially deter-mined by the physical dispersion process, that is, breakup and coalescence, while, at longer mixing times, a further decrease in particle size is obtained as a result of the compatibilization reactions. The shift between the two regimes is progressive and intimately related to the processing conditions. Despite such a complexity, not only the blend morphology but also the elastic properties of the rubber particles can be controlled in a broad range by an adequate adjustment of the relative kinetics between both physical and chemical processes. (C) 2003 Wiley Periodicals, Inc.