The possibility to generate particle-in-particle morphology by controlling blending sequence has been investigated for reactive processing of poly(butylene terephthalate) (PBT) with ethylene-methyl acrylate-glycidyl methacrylate (E-MA-GMA) random terpolymer. Composite droplet morphology consisting of a PBT matrix, a E-MA-GMA dispersed phase and PBT sub-inclusions is spontaneously formed upon melt mixing due to the coalescence of poorly stabilized E-MA-GMA particles. The development and dimensions of this complex morphology is mainly controlled by the relative kinetics between the coalescence process and the chemical reactions occurring during the melt processing. This can be influenced by an adequate adjustment of various blending parameters such as blend composition, PBT viscosity and rubber phase reactivity. The generation of particle-in-particle morphology can also be forced by using a two-step blending sequence. In this latter case, blend morphology consisting in PBT matrix with PBT/E-MA-GMA core-shell particles can be generated. (C) 2004 Elsevier Ltd. All rights reserved.