We report a comprehensive investigation of structural, magnetic, and transport properties of as‐quenched and annealed CoxCu1−x(0≤x≤0.20) granular alloys prepared by melt spinning. Using x‐ray diffraction, differential scanning calorimetry measurements, and magnetic characterization, we have uncovered a Co phase separation process which results in the variation of magnetic and transport properties of Co–Cu heterogeneous alloys. In the Co composition range (0≤x≤0.15), the maximum giant magnetoresistance (GMR) was observed for CoCu samples annealed at 450 °C for 30 min, where Co particle diameters are in the range of 3.5–4.5 nm. The variation of magnetic and transport properties with the concentration and size of precipitated Co clusters is discussed, and is consistent with the prediction of the two‐channel model, in which spin‐dependent scattering is dominated by the cluster‐matrix interfaces. The reduction of GMR in high Co concentration is attributed to the appearance of magnetic coupling among magnetic particles. In contrast, very small particles tend to behave superparamagnetically, resulting in the reduction of the ratio of spin‐dependent scattering to spin‐independent scattering potentials, and thus in the reduction of the GMR effect. ©1996 American Institute of Physics.