Steady shear rheology of a dilute emulsion with viscoelastic inclusions is numerically investigated using direct numerical simulations. Batchelor's formulation for rheology of a viscous emulsion is extended for a viscoelastic system. Viscoelasticity is modeled using the Oldroyd-B constitutive equation. A front-tracking finite difference code is used to numerically determine the drop shape, and solve for the velocity and stress fields. The effective stress of the viscoelastic emulsion has three different components due to interfacial tension, viscosity difference (not considered here) and the drop phase viscoelasticity. The interfacial contributions - first and second normal stress differences and shear stresses - vary with Capillary number in a manner similar to those of a Newtonian system. However the shear viscosity decreases with viscoelasticity at low Capillary numbers, and increases at high Capillary numbers. The first normal stress difference due to interfacial contribution decreases with increasing drop phase viscoelasticity. The first normal stress difference due to the drop phase viscoelasticity is found to have a complex dependence on Capillary and Deborah numbers, in contrast with the linear mixing rule. Drop phase viscoelasticity does not contribute significantly to effective shear viscosity of the emulsion. The total first normal stress difference shows an increase with drop phase viscoelasticity at high Capillary numbers. However at low Capillary numbers, a non-monotonic behavior is observed. The results are explained by examining the stress field and the drop shape. (C) 2007 Elsevier B.V. All rights reserved.