The toughening mechanisms in grafted‐rubber concentrate (GRC), dispersed acrylic rubber (DAR), and Proteus rubber‐modified brittle epoxy (i.e., highly crosslinked) systems are examined using scanning electron microscopy, optical microscopy and transmission electron microscopy techniques. The toughening of the GRC‐modified brittle epoxy system is found to be due to cavitation of the GRC rubber particles, followed by formation of limited shear yielding when the crack propagates. Crack bifurcation and crack deflection are also observed in this system. Only crack bifurcation, crack deflection, and possibly crack/particle bridging mechanisms are operative in the DAR‐modified brittle epoxy system. In the case of the Proteus rubber‐modified system, the rubber appears to be rigid (Tg ≈ 28°C). As a result, the crack/particle bridging mechanism is not observed. Only crack deflection and crack pinning mechanisms are found. These observations are in agreement with the toughness measurement results (see Part I), which indicate that the GRC rubber provides the most effective toughening, followed by the DAR rubber, and then by the Proteus rubber. An approach for toughening brittle epoxies is also discussed.