This work aims to investigate the growth and structural evolution of a diffuse interphase generated in a flow field and to highlight its importance on controlling the final properties of compatible multilayer materials. The model polymers chosen are poly(methyl methacrylate) (PMMA) and poly(vinylidene fluoride) (PVDF). Interdiffusion kinetics, geometrical, and rheological properties of the interphase decoupled and coupled to flow have been probed and quantified under fundamental conditions of rheological measurement and under real practical conditions of processing, respectively. Polymer chain orientation is shown to decelerate the interdiffusion coefficient. This phenomenon is demonstrated to be balanced by intermixing (i.e. flow effect) at the vicinity of the interface triggered from excess interfacial shear stress, thus favors development of the interphase. The diffuse interphase generated therein during the processing has been well characterized via scanning electron microscopy coupled with energy dispersive X-ray analysis (SEM-EDX) and transmission electron microscopy (TEM). Results indicate that the interphase is robust with a geometrical property of tens microns depending on processing conditions and the interfacial structure is shown to be smooth with continuous amorphous-crystallization transition between neighboring layers without causing any interfacial disturbances. Finally, experimental studies concerning the interfacial flow instability and encapsulation in coextrusion process have been performed, taking into account some key classical decisive parameters such as viscosity ratio, thickness ratio and elasticity ratio, etc. Different from severe flow instability observed in incompatible multilayer systems, presence of the interphase at PMMA/PVDF multilayers plays a vital role in weakening (or even eliminating) the viscous instabilities and elastic instabilities despite of the very high rheological contrast. POLYM. ENG. SCI., 55:771-791, 2015. (c) 2014 Society of Plastics Engineers