The factors affecting the morphology and mechanical properties of quaternary blends of poly(butylene terephthalate) (PBT), poly(phenylene oxide)(PPO), a reactive compatibilizer, and poly(styrene-b-(ethylene-co-butylene)-b-styrene) (SEBS), as an impact modifier, were investigated in attempts to obtain toughened blends. Three different materials were employed as the reactive compatibilizers. Each contains a functional group which can react with -COOH end group of PBT and its main chain consists of polystyrene (PS) which is known to be miscible with PPO. They are poly[ (ethylene-co-glycidyl methacrylate ) -g-poly-styrene] ( Modiper), reactive polystyrene (RPS), and poly(styrene-co-glycidyl methacrylate) (SGMA). Among them, RPS containing oxazoline groups was found to be the most effective compatibilizer in terms of morphology control and improvements of the mechanical properties. The impact strength of the ternary blends without an impact modifier was not increased significantlyt. However, when SEBS is added, the impact strength and elongation were improved to a great extent. It was also found that the mixing protocol plays an important role in improvement of the mechanical properties.