The second-generation composite materials were added to increase the strain to failure of the primary phase and/or create a dispersed second phase, thereby enhancing the fracture toughness of the thermosetting matrix. These matrices offered novel design capabilities for composites in a variety of aircraft applications. To improve the damage tolerance of composite materials even further, an engineering approach to toughening was used to modify the highly stressed interlayer with either a tougher material or through the use of preformed particles, leading to the third generation of composite materials. This chapter discusses the development, processes, application, advantages, and disadvantages of dispersed-phase toughening of thermoset matrices. Information on the processes of particle interlayer toughening of composite materials is also included.