Addition of external additives as compatibilizers is known to improve exfoliation of nanoclay in various polymeric matrices. This study found that oxazoline functionalized polystyrene (OPS) is an effective compatibilizer to improve the dispersion of organoclay (Cloisite 20A) in polyphenylene ether (PPE)-based blends. The main objective of this study was to understand the mechanism of OPS as a compatibilizer for dispersion of nanoclay in PPE-based blends and evaluate whether the master-batch of organoclay in OPS can be used to disperse nanoclay in various PPE-based blends irrespective of the type of the other polymer component in the blend. Although the addition of OPS to polystyrene (PS) alone resulted in mere intercalation of organoclay, its addition to PPE-based blends was found to result in mixed clay dispersion of intercalated, exfoliated, and to some extent collapsed phases. Addition of OPS-organoclay combination in master-batch mode showed similar results as direct mode addition. At least 15% of OPS was required for effective dispersion of Cloisite 20A in PPE-high impact polystyrene blend. The possible role of solubility of OPS in the matrix and high melt shear of PPE-based matrix was investigated to understand the exclusive action of OPS in PPE-based blends. X-ray diffraction and transmission electron microscopy techniques were used to study the organoclay dispersion. Further master batches of organoclay in neat OPS and OPS containing PPE-based blends were evaluated in other PPE-based commercial blends. Of the various blends studied, blend containing phosphite additive showed better dispersion of organoclay. (C) 2010 Wiley Periodicals, Inc. J Appl Polvm Sci 117: 1718-1730, 2010