Edge cracks, which are typical formability defects, severely limit the widespread application of Mg/Al composite sheets. Accurate prediction of damage is crucial for understanding the underlying mechanisms behind crack formation. In this study, a continuum damage model that incorporates the stress-state function and effective equivalent plastic strain into the standard Lemaitre model is proposed. This enhanced model effectively addresses the issues of damage-evolution linearization and tension–compression asymmetry in the standard Lemaitre model. Thus, it can be successfully applied to predict the fracture response of ductile composite materials under pressure-forming conditions. Considering AZ31B Mg alloy and 5052 Al alloy as experimental materials, physical experiments and numerical validation are performed under a 50% reduction and 350 °C. The findings show that the proposed model effectively captures crack initiation and propagation during the rolling process, with errors of only 23.1% and 19.9% for average crack quantity and length, respectively. Results of numerical analysis reveals that the high-stress triaxiality at the edge of the sheet contributes significantly to crack formation. Additionally, the strain along the normal direction in the Al alloy significantly affects crack propagation and the formation of serrated cracks on the side of Mg alloy. This study provides important theoretical foundations for the development of Mg-based composite sheets.