This paper examines the mechanisms by which a polymer is dispersed in a co-rotating twin-screw extruder. An experimental investigation of the morphological evolution has been carried out on a 45-mm co-rotating twin-screw extruder. Polyethylene/polystyrene (PE/PS) blends in the low concentration range (i.e., 5-15 wt% of PE) were used as a model system. The following general trends were observed. First, the minor phase right after melting is predominantly in a fibrillar form. Secondly, droplet and fiber diameter at this early stage of compounding are already in the micron or sub-micron range. Even though a wide variety of mixing section configurations were used, the fibers created in the early compounding stages were relatively stable throughout extrusion. Morphological evolution after melting must therefore be discussed in terms of variation in the fiber fraction (i.e., fiber to droplet transition) rather than in a change in particle diameter. A control volume model for the flow in kneading blocks is used to interpret the morphological results and to predict the deformation and breakup of dispersed phase fibers under shear and in absence of coalescence. Theoretical results indicate that fiber breakup under shear is not likely in the kneading block under the normal processing conditions, which is confirmed by morphological observations made at the mixing section exit. The influence of several geometrical parameters on mixing and pumping in kneading blocks is also discussed with the use of flow model results.