In-situ tensile deformation of toughened PMMA was investigated using small-angle X-ray scattering (SAXS). The toughening particles had a three-layer structure consisting of a PMMA core, a rubber shell, and a thin PMMA outer layer. Uniaxial tensile stress was applied at a constant strain rate of 5 mm/min at room temperature. Under these conditions the dominant deformation mechanism was found to depend on the concentration of toughening particles. When the particle concentration was low, the SAXS patterns showed that highly localized failure occurred inside the particles as the yield point of the tensile curve was reached. The failure began at the poles of the particles, at or immediately adjacent to the core/shell interface, and during yield it grew around this interface. At high particle concentration the particles stretched without failing. No evidence for crazing was seen in any of the scattering patterns. The major deformation mechanisms occurred inside the toughening particles rather than in the PMMA matrix.