Crystalline morphology and phase structure play a decisive role in determining the properties of polymer blends. In this research, biodegradable blends of poly(l-lactic acid) (PLLA) and poly(butylene succinate) (PBS) have been prepared by melt-extrusion and molded into specimens with rapid cooling. The crystalline morphology (e.g., crystallinity, crystal type and perfection) is manipulated by annealing the molded products from solid-state within a short time. This work emphasizes on the effects of annealing conditions on crystallization and properties of the blends, especially impact toughness and thermal stability. Phase-separation morphology with PBS dispersed particles smaller than 1 μm is created in the blends. The blend properties are successfully dictated by controlling the crystalline morphology. Increasing crystallinity alone does not ensure the enhancement of impact toughness. A great improvement of impact strength and heat resistance is achieved when the PLLA/PBS (80/20) blends are plasticized with 5% medium molecular-weight poly(ethylene glycol), and simultaneously heat-treated at a temperature close to the cold-crystallization of PLLA. The plasticized blend annealed at 92 °C for only 10 min exhibits ten-fold impact strength over the starting PLLA and slightly higher heat distortion temperature. The microscopic study demonstrates the fracture mechanism changes from crazing to shear yielding in this annealed sample.