Dynamic vulcanization is a unique reactive processing which creates a two-phase material with crosslinked particles of A polymer dispersed in a matrix of B polymer. In this research we carried out the dynamic vulcanization of dissimilar polymers and undertook a quantitative analysis of the size reduction and the phase inversion phenomena in the two-phase melt. The immiscible polymers employed were poly(epsilon-caprolactone) (PCL) and hydrogenated-nitrile rubber (NBR). The two polymers in 40/60 and 65/35 (PCL/NBR) weight ratios were melt-mixed in a miniature mixing reactor at 120-degrees-C in the presence of a small amount of cure agent for the NBR, p,p'-dibenzoyl quinonedioxime. Successive sampling was carried out at regular intervals by extruding. The angular dependence of the light scattered from each extruded sample was measured under V(v) (parallel polarization) condition. From the Dabye-Bueche plot of the angular dependence of scattered light, the heterogeneity parameters (correlation distance xi, specific interfacial area S(sp), and average particle size RBAR) were obtained as a function of the residence time. The xi and RBAR decreased with time, attained a minimum, and then increased. In the 40/60 blend, phase inversion took place and, after the inversion, RBAR rapidly increased. These results suggest (1) size reduction proceeds at the early stage, (2) phase inversion takes place when the viscosity of NBR matrix eta-NBR approaches the value of eta-PCL.phi-NBR/phi.PCL (phi-i: volume fraction), and (3) after the phase inversion, NBR particles begin to coagulate with each other in a PCL matrix with low viscosity. The increase in RBAR after the inversion was successfully restricted by adding a small amount of vinylsilane coupling agent.