AbstractA newly‐developed energy‐based model for cavitation in rubber particles provides a quantitative basis for understanding the factors controlling toughness in rubber‐modified plastics. Cavitation of the rubber is the initial step in the toughening mechanism, and is shown to accelerate yielding of the matrix, either by the formation of dilatation bands or by multiple crazing. Cavitation is thus a strain‐softening effect. However, in some cases the cavitated rubber forms fibrils which become highly stretched as local strains increase, and thus begin to carry a significant fraction of the applied stress. The resulting strain‐hardening ensures that yielding is not limited to a small deformation zone at a crack tip, but spreads outwards.