The effects of addition of a reactive compatibilizer, a random terpolymer, on morphological and rheological properties of blends of polyamide dispersed in a polyethylene matrix were studied experimentally. This addition leads to smaller size and narrower size distribution of the dispersed phase. This has been related to the presence, at the interface, of copolymers, formed in situ by reaction between the polyamide and the terpolymer, which form an interphase between the nodules and the matrix. The linear viscoelasticity of these compatibilized blends reveals that, in addition to the form relaxation process (relaxation time lambda (d)) even observed in absence of compatibilizer, another relaxation process, which has been related to the dynamics of nodule-matrix interphase, is observed at a characteristic time lambda (int) higher than lambda (d). The concentration and molecular weight dependence of this characteristic time lambda (int) and the intensity H-int of the relaxation mechanism associated to lambda (int) has been investigated. The steady shear measurements exhibit an unusual behavior never observed before in blends of immiscible polymers. Indeed, the viscosity curve shows two plateau regions, respectively, at low and moderate shear rates, connected by a rather steep portion of curve, which is associated to a characteristic time of the same order of magnitude as lambda (int). This behavior has been interpreted by considering that the response of the system at the lowest shear races is dominated by the molecular dynamics of the nodule-matrix interphase, whereas at higher shear rates the system behaves as an emulsion with hydrodynamic particle-particle interactions. The viscosity excess, due to the slowest relaxation process and expressed as the difference between the two plateau viscosities, shows a marked dependence on both concentration and molecular weight of the compatibilizer. (C) 2000 The Society of Rheology. [S0148-6055(00)01005-1].