A method for modelling the interactions of dislocations with inclusions has been developed to analyse toughening mechanisms in alloys. This method is different from the superposition method in that infinite domain solutions and image stress fields are not superimposed. The method is based on the extended finite element method (XFEM) in which the dislocations are modelled according to the Volterra dislocation model. Interior discontinuities are introduced across dislocation glide planes using enrichment functions and the resulting boundary value problem is solved through the standard finite element variational approach. The level set method is used to describe the geometry of the dislocation glide planes without any explicit treatment of the interface geometry which provides a convenient and an appealing means for describing the dislocation. A method for estimating the Peach-Koehler force by the domain form of J-integral is considered. The convergence and accuracy of the method are studied for an edge dislocation interacting with a free surface where analytical solutions are available. The force converges to the exact solution at an optimal rate for linear finite elements. The applicability of the method to dislocation interactions with inclusions is illustrated with a system of Aluminium matrix containing Aluminium-copper precipitates. The effect of size, shape and orientation of the inclusions on an edge dislocation for a difference in stiffness and coefficient of thermal expansion of the inclusions and matrix is considered. The force on the dislocation due to a hard inclusion increased by 8% in approaching the sharp corners of a square inclusion than a circular inclusion of equal area. The dislocation experienced 24% more force in moving towards the edges of a square shaped inclusion than towards its centre. When the areas of the inclusions were halved, 30% less force was exerted on the dislocation. This method was used to analyse interfaces with mismatch strains. Introducing eigenstrains equal to 0.004 to the elastic mismatch increased the force by 15 times for a circular inclusion. The energy needed to move an edge dislocation through a domain filled with circular inclusions is 4% more than that needed for a domain with square shaped inclusions.