The effectiveness of rubber interlayers between inorganic particles and polymer matrix for toughening has been a controversial subject. In this research, a series of rubber-encapsulated glass beads and its epoxy composites were prepared, and underlying mechanisms which can connect material parameters related with rubber interlayers with energy dissipation mechanisms, were investigated. The critical stress intensity factor (K-IC) and critical strain energy release rate (G(IC)) of rubber-encapsulated glass bead filled epoxies were found to insignificantly depend on the existence and thickness of rubber interlayers. Microscopy studies on fracture process identified four different micro-mechanical deformations which can dissipate fracture energy: step formation, micro-shear banding, debonding of glass beads, and diffuse matrix shear yielding. It was found that the first two became less extensive and the others became more extensive as the thickness of rubber interlayers increases. This offsetting effect of micro-mechanical deformations seems to be the reason for the absence of significant toughening effect of rubber interlayers.