The phase morphology and mechanical properties of polypropylene (PP) composites containing ethylene-octene elastomer (EOR) and calcium carbonate (CaCO3) filler were investigated by comparing the toughening effect of unmodified EOR with EOR grafted with maleic anhydride (EOR-MA). EORs of various MA contents were prepared by free-radical grafting of MA onto the EOR backbone using a reactive extrusion process. The composite morphology was directly explored by scanning electron microscopy technique and indirectly explored by differential scanning calorimetry and dynamic mechanical analysis. Separate dispersion of the elastomer and filler particles was achieved by using unmodified EOR. Modification of EOR by maleic anhydride grafting resulted in encapsulation of the filler particles. The mechanical properties of the composites were found to depend mainly on composite morphology and composition and, to a lesser degree, on maleic anhydride concentration. The results of this study showed that when composites contained an equal or higher amount of elastomer relative to filler, a composite with a separate dispersion structure was preferred. (C) 2003 Wiley Periodicals, Inc.