Compatibilization of blends of an immiscible polymeric system consisting of poly(butylene terephthalate) (PBT) and poly(phenylene ether) (PPE) by a set of low molecular weight epoxy, varying in chain flexibility and functionality, was studied in terms of morphology and mechanical properties. Evidences, such as reduction of epoxide peak in FT-IR spectra and viscosity and glass transition temperatures higher than PBT of melt-blended materials of PBT-epoxy indicated formation of PBT-epoxy copolymers, which in turn compatibilized and stabilized the morphology in PPE-PBT-epoxy blends. Significant improvements in tensile and impact strengths resulted.