This is a second paper in the series concerning the synthesis and characterization of composite polymeric particles with encapsulated magnetic iron oxide and bearing reactive beta-diketone groups on the surface. Composite particles have been prepared by two-step method in which first step requires preparation of the iron oxide nano-particles and during second step iron oxide was encapsulated into formed poly(styrene/acetoacetoxyethyl methacrylate) (PS-AAEM) particles directly during polymerization process. It has been found that the modification of the iron oxide nano-particle surface with sodium oleate improves significantly the encapsulation during polymerization process. This procedure gives a possibility to obtain composite particles with raspberry morphology and both the particle size and iron oxide content can be varied. Change of monomer to iron oxide ratio gives a possibility to change effectively the morphology of hybrid particles, however, polydispersity of composite particles increases at higher content of magnetic particles in the system. Variation of AAEM concentration in reaction mixture at constant iron oxide particles concentration gives a possibility to control the particle size of formed hybrid microspheres. Composite particles were characterized by dynamic light scattering and electron microscopy (SEM) with respect to their particle size and morphology of the surface layer. X-ray diffraction (XRD) and magnetization measurements indicate presence of maghemite (gamma-Fe2O3) in composite particles. (c) 2005 Elsevier Ltd. All rights reserved.