The use of Digital Image Correlation (DIC) to reveal microstructural damage in cross-ply laminates was investigated. Matrix toughness plays a key role in governing microcracking at the tow level in near-surface plies. Experiments revealed that using a tough epoxy polymer as the matrix of the laminate resulted in increased laminate moduli in the principal directions. DIC provides insights into cross-ply laminate failure; the increase in modulus is attributed to microcrack formation in transverse plies. Early onset of matrix cracking around the tows is revealed by variations in the strain along the gauge length. The use of a tough epoxy polymer delays the load at which this cracking occurs. When an untoughened epoxy polymer is used as the matrix, microcracking can be observed at the beginning of the test, suggesting processing induced damage. The use of toughened polymers as the matrix of composite laminates is recommended to mitigate against this.