The in situ compatibilization of poly(butylene terephthalate) (PBT) with liquid crystalline polymer (LCP) via catalyzed transesterification reaction was examined through thermal, rheological, morphological and mechanical studies. The addition of catalyst, dibutyltindilaurate, was found to promote the transesterification between PBT and LCP. Maintenance of high vacuum environment was required to produce the high molecular weight copolymers in the reactor, which, acting at the interface, diminished the size of the dispersed phase (LCP) and enhanced interfacial adhesion that led to an early increase of the flexural strength. Flexural strength was reduced after long time reaction due to the chain scission. Transesterification confirmed by NMR spectroscopic analysis played a major role in the interchange process.