The objective of this research is to develop real-time failure detection techniques for damage assessment of composite materials using optical fiber sensors. Signals from matrix cracking or fiber fracture in composite laminates are treated by signal processing unit in real-time. This paper describes the implementation of time-frequency analysis such as the Short Time Fourier Transform(STFT) to determine the time of occurrence of failure. In order to verify the performance of the optical fiber sensor for stress wave detection, we performed pencil break test with EFPI sensor and compared it with that of PZT. The EFPI sensor was embedded in composite beam to sense the failure signals and a tensile test was performed. The signals of the fiber optic sensor when damage occurred were characterized using STFT and wavelet transform. Failure detection system detected the moment of failure accurately and showed good sensitivity with the infinitesimal failure signal.