The rather intractable polymer poly(2,6-dimethyl-1,4-phenylene ether) (PPE) can easily be processed by using epoxy resin as a reactive solvent. In this reactive solution processing technique, PPE is dissolved in epoxy resin at elevated temperatures and processed. After processing, the epoxy resin is polymerized and phase separation accompanied by phase inversion is initiated and the reactive solvent is subsequently integrated in the final material. In this paper, attention was focused on the possibility of tuning the properties of the in situ polymerized dispersed epoxy phase. A solvent system was studied which consisted of epoxy resins and diamine curing agents, based on bisphenol and poly(propylene oxide). Both resins could be used as a solvent for PPE and the resulting processable solutions exhibited upper critical solution temperature behaviour. Upon increasing the poly(propylene oxide) content in the reactive solvent system the properties of the dispersed phase could be varied gradually from non-ductile glassy to completely rubbery, and consequently the properties of the PPE/epoxy could be controlled over a broad range. The presence of a non-ductile glassy dispersed phase (with yield stress " yield stress of PPE) resulted in an increase in the yield stress of the material and was shown to constrain yielding of the PPE matrix. Reduction of the yield stress of the dispersed phase facilitated ductile deformation of PPE in tensile loading but resulted additionally in a reduction in toughness. After changing the properties of the dispersed epoxy phase to completely rubbery a substantial increase in toughness was obtained. Interestingly, the rubber with the lowest level of adhesion proved to be the most efficient impact modifier for PPE.