Basics of the Michelson interferometer.
With a michelson interferometer you create an interference pattern due the phase difference of the laser beams in the setup. This pattern when created sucessfully looks like this: http://mcuplace.com/dump/Interfearence.jpe
When you move the one of the mirrors, you are changing the distance one beam has to travel, and therefore the interference pattern changes. As you move the mirror, it appears to move outwards (or inwards). By using a simple photo detector, you can easily count the number of "peaks" and "valleys" to determine the distance the movable mirror moved. The distance moved is n * lambda / 2 . Therefore you can resolve distances moved on the order of the wavelength of light used.