Supertough poly(butylene terephthalate) (PBT) blends were prepared by melting with poly(ethyleneoctene) (POE) and glycidyl methacrylate grafted POE (POE-g-GMA), and the toughening mechanism was systematically analyzed. Scanning electron microscopy (SEM) and rheological measurements identified that POE-g-GMA effectively improved the interaction between PBT and elastomer. The compatibility between phases improved gradually, while the notched impact strength increased at first and then decreased with the increase of POE-g-GMA content. The blends containing 10 wt % POE-g-GMA showed the highest impact strength, which was 18.0-fold compared to that of neat PBT. The study of the toughening mechanism indicated that a suitable compatibility was significant for obtaining supertough PBT blends because the good elastomers dispersion and suitable interfacial adhesion can be obtained simultaneously. The weak interface and the large particle size led to unstable crack propagation, while too strong interfacial adhesion prevented interface debonding and arrested matrix shear yielding. Microvoiding generated by both the debonding and internal cavitation of elastomers followed by matrix shear yielding was the main toughening mechanism in toughened PBT blends.