Poly(lactic acid) (PLA) and poly(butylene adipate-co-terephthalate) (PBAT) were melt-blended in the presence of glycidyl methacrylate (GMA) by twin-screw extrusion. The physical properties, phase morphology, thermal properties, and melt rheological behavior of the blends were investigated by tensile tests, Charpy impact tests, scanning electron microscopy (SEM), differential scanning calorimetry (DSC), and advanced rheology expended system (ARES). With 2 or 5 wt% GMA, the tensile toughness of the PLA/PBAT blend was greatly increased without severe loss in tensile strength. The impact strength of the blend was also significantly improved at 1 wt% of GMA addition but ultimately trended to be saturated with increasing GMA. SEM micrographs revealed that better miscibility and more shear yielding mechanism were involved in the toughening of the blend. DSC results indicated that the blend is still a two-phase system in the presence of reaction agent and the addition of GMA was found to enhance the interfacial adhesion between PLA and PBAT. Rheological results revealed that the addition of T-GMA increased the storage moduli (G'), loss moduli (G'') and complex viscosity of the blends at nearly all frequencies. The decreased shear-thinning tendency of the blends in the presence of T-GMA also implied improved melt stability during processing.