The difference between reactive and nonreactive polymer blends in terms of processing and morphology has been investigated. The glassy phases for the blends are an oxazoline functional polystyrene (PS‐Ox) and a similar non‐functional polystyrene (PS). The rubbery phases are an ethylene‐propylene rubber (EP) and a similar ethylene‐propylene rubber (EP‐MA) with 07% grafted maleic anhydride. In the case of PS‐Ox/EP‐MA blends, the oxazoline group may react with the grafted rubber functionality at the interface between the two immiscible components during blending to form a compatibilizing agent in‐situ. The nonreactive blends systems of PS‐Ox/EP and PS/EP‐MA were used for comparison to the reactive system. The blend components are rheologically matched to simplify the interpretation of the process and morphological data. The blends were prepared in a batch mixer with roller blades. The torque required for mixing was measured during the blending process. The torque traces for the reactive blends exhibited a peak in torque, attributed to the chemical reaction at the interface. The weight fraction of gel in the blends was used to measure the extent of reaction. It correlates well with the mixing torques and rheological properties. The nonreactive PS‐Ox/EP and PS/EP‐MA blends show poor interfacial adhesion between the two phases. In contrast, the reactive PS‐Ox/EP‐MA blends show excellent during annealing is also much greater for the reactive blends. Varying the functionality concentration in the PS phase shows that the dispersed phase rubber particle size is reduced by increasing the concentration of oxazoline in the matrix. Blends with no or small amounts of functionality in the PS phase exhibit yield behavior in tension. However, a level of concentration of reactive functionality may be reached where the material becomes brittle.