The steady-state and transient shear flow dynamics of polymer drops in a microchannel are investigated using the dissipative particle dynamics (DPD) method. The polymer drop is made up of 10% DPD solvent particles and 90% finite extensible non-linear elastic (FENE) bead spring chains, with each chain consisting of 16 beads. The channel's upper and lower walls are made up of three layers of DPD particles, respectively, perpendicular to Z-axis, and moving in opposite directions to generate the shear flow field. Periodic boundary conditions are implemented in the X and Y directions. With FENE chains, shear thinning and normal stress difference effects are observed. The "colour" method is employed to model immiscible fluids according to Rothman-Keller method; the X-parameters in Flory-Huggins-type models are also analysed accordingly. The interfacial tension is computed using the Irving-Kirkwood equation. For polymer drops in a steady-state shear field, the relationship between the deformation parameter (D-def) and the capillary number (Ca) can be delineated into a linear and nonlinear regime, in qualitative agreement with experimental results of Guido et al. [J. Rheol. 42 (2) (1998) 395]. In the present study, Ca < 0.22, in the linear regime. As the shear rate increases further, the drop elongates; a sufficiently deformed drop will break up; and a possible coalescence may occur for two neighbouring drops. Dynamical equilibrium between break-up and coalescence results in a steady-state average droplet-size distribution. In a shear reversal flow, an elongated and oriented polymer drop retracts towards a roughly spherical shape, with a decrease in the first normal stress difference. The polymer drop is found to undergo a tumbling mode at high Schmidt numbers. A stress analysis shows that the stress response is different from that of a suspension of solid spheres. An overshoot in the strain is observed for the polymer drop under extension due to the memory of the FENE chains. (C) 2004 Elsevier B.V. All rights reserved.