Fire-retardant polypropylene (PP) composites were prepared by combining this polymer with uncoated and surface treated forms of magnesium hydroxide filler and various elastomeric modifiers, with and without maleic anhydride functionalization. Mechanical properties of binary and ternary phase compositions differed significantly and are discussed in terms of their microstructures (determined principally by SEM and FTIR) and the relative interaction of the components. Impact strength, in particular, was strongly influenced by the presence of filler surface treatment and the degree of rubbery phase dispersion. FTIR showed that functionalized ethylene-propylene rubber (F-EPR) reacted with the surface of uncoated magnesium hydroxide leading to extensive rubber encapsulation and an improvement in toughness relative to unmodified EPR, which was present in the matrix only as phase dispersed droplets. However, by blending F-EPR with filler surface treated with magnesium stearate, encapsulation was inhibited and the rubber was preferentially dispersed in the PP matrix. This formulation resulted in both improved filler-matrix interaction and enhanced matrix toughening leading to a further increase in impact strength. The effects of material composition on melt flow behavior and UL94 flammability rating, are also reported.