The effect of embedding a cylindrical microwire temperature sensor on the mode-II interlaminar fracture behavior of 5320 unidirectional tape/epoxy laminates was investigated. The sensor was embedded orthogonal to the fiber direction resulting in the formation of an ‘eye’ shaped resin rich region around the sensor and causing localized fiber waviness. Monolithic laminates with sensor placed at mid-ply, one ply away from the mid- plane, two plies away from the mid- plane and without sensor were fabricated for this study. Delamination cracks were coincident with the mid-plane of the laminates. An increase in the apparent fracture toughness for specimens with sensor in the mid-ply configuration was observed, which can be attributed to the localized fiber waviness around the sensor and its effect on the material properties. No effect on apparent fracture toughness was noticed for the specimens with sensor located one ply away and two ply away from the mid-plane. The test data was subsequently used to develop a 2D, VCCT based plane-strain non-linear finite element model to understand the observed experimental behavior and the impact of the cure induced residual stress. The variation of the material properties with the fiber volume fraction in the vicinity of the sensor and process induced residual stress were also taken into account. A digital image correlation study was performed to monitor the surface strains during the crack propagation. The predictions from the finite element model which included the crack growth behavior, resistance curves and shear strain measurement compared satisfactorily with experimental data.