Microscopic studies on the toughening mechanism of rubber-toughened PMMA (RTPMMA) were carried out using a polarizing optical microscope (POM) and a transmission electron microscope (TEM). POM result showed that in a typical RT-PMMA, a damage zone was developed in the vicinity of crack-tip, and therefore, it was considered that energy dissipation due to the damage zone development was the primary toughening mechanism. TEM result exhibited that the damage zone was a crowd of micro-crazes generated around rubber particles in the vicinity of notch-tip. Finite element analysis was then performed to simulate such damage formations in crack-tip region. Macro-scale and micro-scale models were developed to simulate damage zone formation and micro-crazing, respectively, with use of a damage model. It was shown that the damage model introduced was successfully applied to predict such kind of macro-damage and micro-craze formations.