Unsaturated polyester (UPE) has been toughened by incorporating novel liquid polyurethane (PU) rubber. PU rubber was synthesized using toluene di-isocyanate and polyols such as poly (propylene glycol) and poly (tetramethylene ether) glycol, whose molecular weights vary from 650 to 4000. Particle size was varied from 0.1 to 3 mu m by changing the polyol and the molecular weight of PU rubber, and the effects of particle size on the fracture toughness of PU rubber-modified UPE were investigated. Hydroxyl terminated PU rubber (HTPU) and isocyanate terminated PU rubber (ITPU) were used to study the effects of rubber-matrix adhesion. The toughening mechanisms observed by scanning electron microscope are debonding between rubber and matrix in HTPU-modified UPE, and cavitation in the rubber particle in ITPU-modified UPE. However, shear bands were not observed as UPE is a highly cross-linked thermoset with very short chain length between the cross-links. A 1.9-times increase in fracture toughness of UPE was achieved with the formation of cavitated particles. In order to measure the process zone size at the crack tip, the thin sections of tested double-notched four-point bending specimens were examined by optical microscope.