The bending deformation and matrix cracking in smart composite structures were investigated by conducting four-point bending test of a cross-ply composite beam with embedded fiber optic Michelson sensor. The fiber optic Michelson interferometric sensor was constructed and embedded in the composite beam. The failure of composite beam, due to the cracking in matrix materials, were successfully detected by the fiber optic sensor. The matrix crack in composite beam was confirmed by an edge replica method. The triggered failure signals due to the matrix cracking failure of the composite beam were acquired and characterized. The digital processing method for simultaneous sensing was devised. After acquiring the fiber optic signal with 1 millisecond interval. The fiber optic sensor signal was used to calculate the strain of composite beam and was processed by digital filtering to know the failure instants. The failure instants were obviously noticeable from the filtered signal of the fiber optic sensor which is compared with PZT signal.