Ethylene-propylene-diene elastomer (EPDM), which is grafted with an isocyanate-containing monomer (HI), was blended with polyethyleneterephthalate (PET) and its morphological, thermal, rheological, and mechanical properties were studied. HI was incorporated onto EPDM backbone through a solution graft reaction. When the PET was blended with HI-grafted EPDM (EPDM-g-HI), the morphologies of dispersed phases showed considerable differences in the aspects of particle size and interfacial adhesion compared with those of a PET/EPDM blend. DSC analysis showed that, when blends are cooled slowly, the PET phase in PET/EPDM-g-HI is somewhat amorphous compared with that in the PET/EPDM blend. The increase in complex viscosity, storage modulus and impact strength of PET/EPDM-g-HI blends enabled us to ensure that the compatibility between PET and EPDM improved through functionalization of EPDM with the isocyanate moiety. These results are mainly due to graft PET-EPDM copolymer in situ formed through the chemical reaction between the isocyanate group of EPDM-g-HI and hydroxyl or carboxyl end groups of PET.