The effect of matrix extension on stress concentrations as well as shear stress distribution between fiber and matrix interface is examined in a hybrid composite lamina of finite width subjected to internal cracks. To formulate the problem, a plastic zone of Dugdale type is considered at the crack tips. The results show that in composites with low extensional stiffness, although shear-lag model appears to be excellent in predicting normal stress concentrations in intact filaments, its results on peak shear stresses in the matrix bays remain questionable. According to the results, in a lamina with a weak matrix in extension (epsilon =0.0064), based on, psi =0.25, shear-lag model predicts peak shear stresses to be 58% and 28% below their actual values at r=3 (2a/w =0.1), and r=7 (2a/w =0.3), respectively. It is also, observed that with an increase in matrix extensional stiffness, the values of normal stress concentrations in both HM and LM fibers are reduced by 18% and 16% respectively, for a crack to width ratio of 0.3, epsilon =0.0875,and psi =0.25.