This paper presents a novel surface modification process of super-hard composite layer on a tool steel substrate by electrical discharge machining (EDM) accompanied by in-situ reaction of electrode elements with working fluid. Elements in the semi-sintered TiB2 electrode are transferred to a substrate surface and reacted with decomposed carbon from dielectric working fluid (kerosene) to form a modified layer mainly composed of TiC, B4C and non-reacted TiB2. Hardness of the modified layers increases with increasing pulse duration (tau(p)) and discharge current (I-p), which oppositely give the deteriorating surface roughness. However, the application of rotating motion to the electrode markedly improves surface roughness. Furthermore, applying fine TiB2 powder suspended in working fluid improves both surface roughness and hardness of the modified layers. This is because the gap distance, which is closely related to the impulsive evaporation pressure of working fluid due to a discharged arc, increases with tau(p) and I-p, and is enlarged by addition of the powder in working fluid. A modified layer with thickness of 50 mum, surface roughness (Ra) of 5.5 mum and hardness of 3640HV has been achieved by machining in powder suspended in working fluid with process parameters of I-p=8 A, tau(p)=512 mus and working time of 2.4 ks.