Brominated polystyrene (BPS) is blended with linear low-density polyethylene (LLDPE) to improve its fire retardancy for various applications such as wire and cable covering. To improve compatibility and mechanical properties, styrene-ethylene/butylene-styrene (SEBS) copolymer was added as a compatibilizer. The influence of processing temperature and SEBS elastomer on morphology, interfacial and mechanical properties has been investigated. It was found that melt blending at 230 °C with addition of SEBS elastomer can significantly reduce the BPS particle size to less than 0.5 μm by forming a core-shell structure that enhances the interfacial strength between BPS and LLDPE phases. Addition of 8 phr SEBS elastomer can increase the Izod impact strength at −37 °C by a factor of nearly three, compared to the non-compatibilized LLDPE/BPS system. Double-notch four-point bending (DN-4PB) test reveals that crazing and shear banding are two primary toughening mechanisms for the observed increase in the low temperature impact strength.