Automated Fiber Placement (AFP) is a key enabling technology for high-rate production of aerospace-grade composite structures. Although AFP provides precise and repeatable material deposition, prevailing inspection practices remain predominantly manual, interrupting production flow and limiting throughput. To mitigate these limitations, a novel In-Process AFP Manufacturing Inspection System (IAMIS) has been developed. IAMIS integrates advanced sensing hardware with machine learning (ML)–based analytics to autonomously detect, classify, quantify, triangulate, and respond to defects in real time during AFP operations. Comparative round-robin evaluations confirmed IAMIS's superior accuracy, sensitivity, and robustness in detecting and categorizing diverse defect types when compared with commercially available inspection systems. Beyond real-time defect detection, IAMIS incorporates an AI-based predictive analytics module (IAMIS-AI) that leverages inspection data acquired by IAMIS to support continuous process optimization. Trained on historical manufacturing data—including process parameters, defect characteristics, and part geometry—the IAMIS-AI framework predicts defect occurrence and visualizes potential defect regions on a 3D digital layup model during AFP program planning. These predictive insights enable proactive process adjustments, targeted quality-assurance actions, and reduced downstream rework and downtime. This paper presents the IAMIS system architecture, ML and AI framework design, and experimental validation methodology, and demonstrates how integrating data-driven intelligence into AFP can significantly enhance quality assurance and production efficiency. The adoption of IAMIS establishes a transition from labor-intensive, post-process inspection to a fully automated, intelligent inspection and optimization ecosystem aligned with stringent aerospace manufacturing requirements, while substantially reducing cycle time and cost.