The deformation of a Newtonian/viscoelastic drop suspended in a viscoelastic fluid is investigated using a three-dimensional front-tracking finite-difference method. The viscoelasticity is modelled using the Oldroyd-B constitutive equation. Matrix viscoelasticity affects the drop deformation and the inclination angle with the flow direction. Numerical predictions of these quantities are compared with previous experimental measurements using Boger fluids. The elastic and viscous stresses at the interface, polymer orientation, and the elastic and viscous forces in the domain are carefully investigated as they affect the drop response. Significant change in the drop inclination with increasing viscoelasticity is observed; this is explained in terms of the first normal stress difference. A non-monotonic change – a decrease followed by an increase – in the steady-state drop deformation is observed with increasing Deborah number (De) and explained in terms of the competition between increased localized polymer stretching at the drop tips and the decreased viscous stretching due to change in drop orientation angle. The transient drop orientation angle is found to evolve on the polymer relaxation time scale for high De. The breakup of a viscous drop in a viscoelastic matrix is inhibited for small De, and promoted at higher De. Polymeric to total viscosity ratio β was seen to affect the result through the combined parameter βDe indicating a dominant role of the first normal stress difference. A viscoelastic drop in a viscoelastic matrix with matched relaxation time experiences less deformation compared to the case when one of the phases is viscous; but the inclination angle assumes an intermediate value between two extreme cases. Increased drop phase viscoelasticity compared to matrix phase leads to decreased deformation.