Structural Health Monitoring (SHM) is becoming an increasingly important tool for the maintenance, safety and integrity of aerospace structural systems. Immune to electromagnetic interference, Fiber Bragg Grating (FBG) optical sensor matrices are light-weight and multiplexable, allowing many sensors on a single fiber to be integrated into smart structures. Highly sensitive to minute strains, they can facilitate maximum SHM functionality, with minimum weight and size. Consequently, these optical systems, in conjunction with advanced damage characterization algorithms, are expected to play an increasing role in extending the life and reducing costs of new generations of structures and airframes. In this paper, we discuss the development of both hardware and algorithms to detect, locate and quantify delamination in composite laminated beam structures. We present an integrated SHM system including (a) the capability of interrogating over 50 FBG sensors simultaneously with sub-picometer resolution at over 50 kHz, (b) an FBG-sensor/piezo-actuator matrix smart skin design and methodology, and (c) damage detection location and quantification algorithms based on mode shape or other relevant advanced algorithmic-based damage diagnosis and prognosis techniques. Comparison with other SHM systems (e.g., based on piezo-electric (PVDF) and Scanning Laser Vibrometer sensors) demonstrates better signal-to-noise and damage detection for our FBG system.