An adaptive fiber Bragg grating demodulator is developed for structural health monitoring applications using two-wave mixing interferometer technology. This demodulator uses the photorefractive (PRC) InP: Fe crystal to demodulate the spectral shifts from the fiber Bragg grating (FBG) sensor. Any strains applied on the FBG sensors are encoded as wavelength shifts of the light reflected by the FBG sensor. The wavelength shift is converted into phase shifts and then demodulated by a TWM interferometer with unbalanced path in its reference and signal beam. The low frequency signals, such as signals caused by large quasi-static strain or large temperature drift applied on the FBG sensors, are automatically filtered by the demodulator. One of the structural health monitoring (SHM) applications, acoustic emission event detection and source location determination in a plate structure, will be demonstrated using this demodulator. In this application, a FBG sensor with large dynamic response range is glued on the surface of an aluminum plate. The demodulator actively monitors the FBG sensor. Once there is a dynamic spectral shift signal from the FBG sensor, the demodulator will be triggered to record the signal from the FBG sensor. The recorded signal is used to determine the source location of the acoustic emission event by wavelet transform technique.