Poly (butylene terephthalate), PET, can be impact modified by blending with appropriate ABS materials within a limited range of processing conditions. The morphology of these uncompatibilized blends is unstable; the dispersed phase coarsens when the melt is subjected to low shear conditions, e.g. during certain moulding conditions, which has a deleterious effect on the final blend properties. Terpolymers of methyl methacrylate, glycidyl methacrylate (GMA), and ethyl acrylate have been synthesized and shown to be effective reactive compatibilizers for blends of PET with styrene-acrylonitrile copolymers (SAN) or ABS materials as revealed by improvements in SAN or ABS dispersion and morphological stability. Evidence for reaction between the carboxyl endgroups of PET and the epoxide groups of GMA during melt processing to form a graft copolymer is presented. The effect of terpolymer composition and content on morphology generation and stabilization of PBT-SAN blends has been examined in depth. Moderate amounts of GMA in the terpolymer (>5%) and small amounts of compatibilizer in the blend (<5%) were found to significantly improve SAN dispersion. Blends of PET and SAN containing the compatibilizer did not show any coarsening of the dispersed phase particle size due to coalesence under certian conditions of low shear. A preliminary investigation into the effect of this compatibilizer on PBT-ABS morphology and impact properties revealed greatly improved rubber dispersion and low temperature toughness.