Toughness of poly (butylene terephthalate) (PET) was improved by reactive blending of PET with 2-substituted 1,3-oxazoline intermediates such as low-molecular-weight bisoxazolines, and oxazoline-functionalized nitrile rubbers derived from both nitrile liquid rubber (Nipol(R)) and high-molecular-weight hydrogenated nitrile rubber (Therban(R)). Conversion of 7 mol % of the nitrile groups of Nipol into 1,3-oxazoline, corresponding to less than 1 oxazoline group per chain, was sufficient to afford melt strengthening and substantially improved dispersion and interfacial adhesion of the nitrile rubber microphases in the PBT continuous phase. Also in the case of high molecular weight Therban, oxazoline functionalization significantly improved compatibility with PBT. Best results in terms of toughness/stiffness balance, with impact strength exceeding 200 kJ/m(2), was achieved when PBT was blended with both oxazoline-functionalized high-molecular-weight hydrogenated nitrile rubber and low-molecular-weight bisoxazoline chain extenders. The outstanding performance of such PBT blends, containing 10 and 20 wt % oxazoline-modified Therban and 0.6-1.1 wt % bisoxaoline chain extender, respectively, was attributed to simultaneous bisoxazoline-mediated PBT chain extension, interfacial coupling and dynamic vulcanization of the oxazoline-functionalized nitrile rubber.