Two sets of graft copolymers were prepared by grafting glycidyl methacrylate (GMA) or ally] (3-isocyanate-4-tolyl) carbamate (TAI) onto ethylene/propylene/diene terpolymer (EPDM) in an internal mixer. These graft copolymers were used as the compatibilizer to prepare the thermoplastic elastomers (TPEs) containing 50 wt%, of poly(butylene terephthalate), PBT, 30 wt% of compatibilizer, and 20 wt% of nitrile-butadiene rubber, NBR. The indirect, two-step mixer process was chosen for dynamic curing. The TPEs were characterized by differential scanning calorimetry, scanning electron microscopy, transmission electron microscopy, tensile testing, and dynamic mechanical thermal analysis. It was found that this kind of TPEs possess enhanced toughness and stiffness when compared with the mechanical properties of binary blend EPDM/PBT; the compatibility between EPDM an PBT was improved when grafted EPDMs were used; EPDM-g-GMA and EPDM-g-TAI showed similar effects on the morphology and ultimate mechanical properties of TPEs. The indirect dynamic vulcanization has negative effect on the reactive compatibilization. Both indirect dynamic vulcanization and reactive compatibilization were crucial to obtain droplets of dispersed rubber phase in a continuous thermoplastic matrix. The above results are important for academic knowledge and industry applications. (C) 2008 Wiley Periodicals, Inc. J Appl Polym Sci 110: 3963-3972, 2008