The bending deformation and matrix cracking were investigated by conducting a four-point bending test for a cross-ply composite beam with an 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 matrix cracking, was successfully detected by the fiber optic sensor and the matrix crack in the composite beam was confirmed by an edge replica method. The characteristics of the failure signals from the fiber optic sensor were studied. The strain and failure signals of the composite beam were separated by digital filtering of the signal from the fiber optic sensor. The failure was obviously detectable by the failure signal filtered from the optical signal.