Mechanism of cerium-based inclusion formation and influence on impact toughness were researched in industrial Al-killed steel. In the final product, actual inclusions were complex, consisting of Al-O-Ce (Ce-poor), Al-O-Ce (Ce-rich), Al-O-Ce-S(Al-poor) and S-Ca (Mn-rich) from inside to outside. Results of thermodynamic balance calculation were completely inconsistent with the actual inclusions. Considering decomposing or disappearing of formed inclusions in steel difficult, new computing results showed that inclusions were formed by firstly Al2O3 (exist in molten steel before adding Ce), AlCeO3, Ce2O2S, CaS, Ca (Mn)S and MnS in turn, in better agreement with the actual inclusions. Outside of the actual inclusions, Ce2O2S and CaS had a smaller disregistry with ferrite, which could offer effective nucleation sites. And small inclusion was surrounded in a grain and bigger inclusion was surrounded in two grains at least. Microstructures were observed that grains with Ce were finer than grains without Ce. Moreover, V-notch impact toughness of samples was tested at 0 and −60°C, respectively. Compared with samples without Ce, the values of impact toughness were increased by 161% at 0°C and 225% at −60°C, respectively. And fracture surface with Ce had more and finer dimples and finer cleavages than that without Ce.