The aim of this study was to prepare a compatibilized PP/PBT blend in a twin-screw extruder, using oxazoline-functionalized PP. First we prepared the functionalized PP (PP-g-OXA), and then we used it as a compatibilizer in the subsequent reactive blending stage. Polypropylene was successfully functionalized by ricinoloxazoline maleinate in a corotating twin-screw extruder using a melt free radical grafting technique. Grafting yields up to 2.1 phr were achieved. This functionalized PP used as a compatibilizer markedly improved the mechanical properties of the uncompatibilized PP/PBT (PBT content 30 wt %) blend. Significant improvements were observed, especially in impact strength (Charpy) and elongation at break of the compatibilized blends. The increased interactions between the phases were characterized by SEM analysis, DMTA, and DSC experiments. The properties of the blend greatly depended on the degradation of the PP during grafting. An optimal content of compatibilizer exists, which is dependent on the degradation of PP, grafting yield of oxazoline monomer, and on the amount of free, ungrafted monomer present in the compatibilizer. These factors can be adjusted by properly choosing the processing conditions and chemical parameters.