"Smart Fabrics" are defined as fabrics capable of monitoring their own "health", and sensing environmental conditions. They consist of special type of sensors, signal processing, and communication network embedded into textile substrate. Available conventional sensors and networking systems are not fully technologically mature for such applications. New classes of miniature sensors, signal processing and networking systems are urgently needed for such application. Also, the methodology for integration into textile structures has to be developed. In this paper, the development of smart fabrics with embedded fiber optic systems is presented for applications in health monitoring and diagnostics. Successful development of such smart fabrics with embedded sensors and networks is mainly dependent on the development of the proper miniature sensors technology, and on the integration of these sensors into textile structures. The developed smart fabrics will be discussed and samples of the results will be presented.